Today, I wanted to share a short section from Doyle Farmer’s book: Making Sense of Chaos – A Better Economics for a Better World. The passage presents an interesting contrast between the seemingly identical concepts of risk and uncertainty.
By risk, he [Donald Rumsfeld] meant situations where we know the set of future events and their probabilities. In contrast, he used uncertainty to refer to situations where we don’t know the probability of future events. Under what he called true uncertainty; we may not even be able to imagine all possible future events.
p.107
Risk involves situations where probabilities of outcomes are known or can be estimated based on historical data or models. Uncertainty, on the other hand, arises when probabilities are unknown, or the situation is too complex or novel to predict reliably. Decisions under uncertainty often require more subjective judgment, creativity, and adaptive strategies.
Making this distinction apparent is crucial. Risk management relies on probabilistic tools like statistical analysis, simulations, and decision trees. But uncertainty management demands different techniques such as scenario planning, heuristics, and flexibility in strategy.
Misapplying risk tools to uncertainty can lead to overconfidence, while ignoring risk metrics can result in missed opportunities or unnecessary caution.
