Question

American economist Frank Knight was among the first to carefully distinguish between risk and uncertainty.
a. Use your own words to describe the difference between the two terms.
b. Explain how risk and uncertainty give rise to the potential for economic profit that competition cannot eliminate.

Answer 1

a. A hazard is an unplanned occurrence that, if it happens, may impact one or some of your project goals. The risk is positive if it has a positive impact on your project and it is negative if it has a negative impact on the project. There are separate negative and positive risk response strategies. The goal of a negative risk response strategy is to minimize its impact or likelihood while the goal of a positive risk response strategy is to maximize chance or impact. The lack of complete certainty is confusion. The result of any event is completely unknown to mystery, and it can not be measured or guessed; you have no background information about the event. Uncertainty is not a hazard that is unknown. Through confusion, although it has been established, you completely lack the background information of a case. While you have the background information, you skipped it during the process of identifying risks in the case of an unknown risk.

The following are a few distinctions between risk and uncertainty: you can predict the possibility of a future outcome in danger, while you can't in uncertainty.
Risks can be handled although risk can not be monitored.
Risks can be calculated and quantified, but uncertainty is not possible.
You can give hazard events a chance, but you can't do it with uncertainty.

b. Risk-taking should be an entrepreneur's most important function. Any development that is carried out in anticipation of demand entails risk. Four forms of threat exist. These are ideal for replacement, obsolescence, hazard and ambiguity. The first two were measured, so they are insured. But the other two are threats that are hidden and unpredictable. It is payable to the entrepreneur to bear such risk benefit. If he only gets the normal return, no entrepreneur will be willing to take risks.

Hence the risk-taking incentive must be higher than the actual risk price. If the businessman doesn't get the bonus, he won't be willing to take the risk. Therefore, the greater the risk is the benefit probability. For a fixed payment to the insurance company, the investor may escape such risks. But through benefits, he can't get rid of all risks. He is not an entrepreneur if he does so and would earn only management salaries and not income.

Risk-taking is not the only feature of entrepreneurship which leads to profits. Profits are also attributed to the entrepreneur's ability to organize and manage. It's also an innovation reward. It is important to include the premium paid for the fire insurance in the cost of production. The entrepreneur should predict and insure such a threat. In reality, an insurable risk is no risk and, because of insurable risk, profit can not arise.