i. Risk, Anxiety and judgmental accuracy: Constans, (2001) asserts that there is a chance that “judgmental accuracy” is correlated to heightened anxiety. However, Constans conducted a study where anxiety (and worry) in college student’s estimation of their performance on an upcoming exam showed errors in their risk assessments. High levels of anxiety that are not attributed to anything in particular, the probability and degree of suffering associated with a negative experience is misjudged.
ii. Risk and uncertainty: In his seminal work Risk, Uncertainty, and Profit, Knight (1921) established the distinction between risk and uncertainty. Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. The term "risk," as loosely used in everyday speech and in economic discussion, really covers two things which, functionally at least, in their causal relations to the phenomena of economic organization, are categorically different. The essential fact is that "risk" means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomenon depending on which of the two is really present and operating. It will appear that a measurable uncertainty, or "risk" proper, as we shall use the term, is so far different from an immeasurable one that it is not in effect an uncertainty at all. We accordingly restrict the term "uncertainty" to cases of the non-quantitative type. Thus, uncertainty is immeasurable, not possible to calculate, while risk is measurable.
• Uncertainty: The lack of complete certainty, that is, the existence of more than one possibility. The
"true" outcome/state/result/value is not known.
• Measurement of uncertainty: A set of probabilities assigned to a set of possibilities. Example: "There is a 60% chance this market will double in five years"
Risk therefore is a state of uncertainty where some of the possibilities involve a loss, catastrophe, or other undesirable outcome.
• Measurement of risk: A set of possibilities each with quantified probabilities and quantified losses. Example: "There is a 40% chance the proposed oil well will be dry with a loss of Ksh.12 billion in exploratory drilling costs". In this sense, Hubbard uses the terms so that one may have uncertainty without risk but not risk without uncertainty. We can be uncertain about the winner of a contest, but unless we have some personal stake in it, we have no risk. If we bet money on the outcome of the contest, then we have a risk. In both cases there is more than one outcome. The measure of uncertainty refers only to the probabilities assigned to outcomes, while the measure of risk requires both probabilities for outcomes and losses quantified for outcomes.
iii. Risk attitude, appetite and tolerance: The terms attitude, appetite and tolerance are often used similarly to describe an organization's or individual's attitude towards risk taking. Risk averse, risk neutral and risk seeking are examples of the terms that may be used to describe a risk attitude. Risk tolerance looks at acceptable/unacceptable deviations from what is expected. Risk appetite looks at how much risk one is willing to accept. There can still be deviations that are within a risk appetite. For example, recent research finds that insured individuals are significantly likely to divest from risky asset holdings in response to a decline in health, controlling for variables such as income, age, and out-of-pocket medical expenses.
iv. Risk as a vector quantity: This relates risk to perception. Hubbard proposes that risk is a kind of "vector quantity" that does not collapse the probability and magnitude of a risk by presuming anything about the risk tolerance of the decision maker. Risks are simply described as a set or function of possible loss amounts, each associated with specific probabilities. How this array is collapsed into a single value cannot be done until the risk tolerance of the decision maker is quantified. Risk can be both negative and positive, but it tends to be the negative side that people focus on. This is because some things can be dangerous, such as putting their own or someone else’s life at risk. Risks concern people as they think that they will have a negative effect on their future.
Titany answered the question on December 7, 2021 at 07:28