Preliminary Concepts and Issues

Although distinction is typically made between risk and uncertainty, Doerig (2003) defines risk as “uncertainty about a future outcome.” The distinction between risk and uncertainty, which is due to Knight (1921), is straightforward. Under conditions of risk, no-one knows for sure what outcome will materialise, but a probability distribution for the possible outcomes is available. The probability distribution may be subjective, typically based on historical experience and/or judgment about what is likely and less likely to happen in the future given the status quo and possible changes to the status quo . Alternatively, it could be objective like the probability distribution of the outcome of tossing a (fair) coin. Under uncertainty, by contrast, probability distributions are unavailable. It is possible, however, that Doerig (2003) did not use the word “uncertainty” in this strict statistical sense but rather in a non-technical sense that implies lack of knowledge about possible future outcomes. Irrespective of the definition, Doerig (2003) correctly argues that “risk is part of corporate life” and that “it is the essence of financial institutions’ activities.” He describes risk as being “highly multifaceted, complex and often interlinked” Eliminating risk entirely means closing down the business. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.