Risk and Uncertainty

Though few notice the difference, “risk” and “uncertainty” are technically distinct concepts. Risk involves probabilities that can be calculated-for instance, the probability of getting a head when tossing a fair coin or the probability of drawing twenty-one at blackjack. By contrast, uncertainty relates to events of unknown and perhaps unknowable probability, such as getting a flat tire on the way to work tomorrow morning (assuming that you will drive to work tomorrow morning). Either way, whether or not there are probabilities, every consumer faces prospective windfalls, accidents, gambles, epidemics, good buys, lemons, earthquakes, and so on, and clever consumers can plan their spending and behavior to avoid trouble or encourage gain.