Page 163 - BA2 Integrated Workbook - Student 2017

Risk 1: summarising and analysing data

Risk and uncertainty

We know that risk is an important concept in decision making. Most decisions involve
looking to the future and estimating future costs or benefits. These estimates will
inevitably involve uncertainties and assumptions.

Consideration of risk is therefore important. We have to be able to reflect this risk and
uncertainty in our financial evaluations relating to these decisions.

In everyday speech most people use the terms 'risk' and 'uncertainty' as though they
were interchangeable. As far as your CIMA studies are concerned, however, there is
a distinction.

1.1 Risk

The CIMA terminology defines risk as 'condition in which there exists a
quantifiable dispersion in the possible outcomes from any activity'.

The term 'risk' is used to describe a scenario when we know the different
possible outcomes and can estimate their associated probabilities

1.2 Uncertainty

The CIMA terminology defines uncertainty as 'inability to predict the
outcome from an activity due to lack of information about the required
input/output relationships or about the environment within which the
activity takes place'.

The term 'uncertainty' is used when we do not know the possible outcomes
and/or their associated probabilities. Uncertainty is essentially a matter of
ignorance. The future cannot be predicted because there is insufficient information
about what the future outcomes might be. Decisions under conditions of uncertainty
are often a matter of guesswork.

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