Understanding the Difference between Risk and Uncertainty

The distinction between risk and uncertainty has a long history in economics. Risk refers to situations in which people have numerical probabilities to base their decisions on, such as fair games of chance or stable frequencies. Uncertainty, on the other hand, arises when decisions have to be made without numerical probabilities. The concept of uncertainty was emphasized by economists Frank Knight and John Maynard Keynes in the early 20th century. Despite the ability to quantify some risks, uncertainties, especially those related to geopolitical challenges, climate change mitigation, and cybersecurity, remain difficult to measure precisely.