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Risk and Uncertainty in Business - Essay Example

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Risk and Uncertainty in Business

This discussion aims at the business world and the concept of risk or uncertainty, or both, that affects the decisions made at a daily basis and affect the economy at a global level, as well as the lives of many.
Frank Hyneman Knight (1885-1972) was one of the most diverse and influential economists of the twentieth century. He laid the foundations for significant theories such as the modern theories of financial markets and entrepreneurship. He was also a teacher, and with this role, he helped establish the Chicago school of economics. (Emmett)
Knight's Doctoral thesis, titles Risk, Uncertainty, and Profit, was published in 1917. In it, Knight looked into the relation between the ongoing changes in the economy and the knowledge that people possess about it. He discussed two very important forms of 'changes' that he called risk and uncertainty, as the title of the thesis suggests. He said that 'risk' came from known conditions and incidents that have happened repeatedly over time and people have found ways to deal with these changes through co-operation and collaboration. Uncertainty, on the other hand, cannot be insured and is a change we cannot fully anticipate or determine the probability of. (Emmett, n.d)
Today, we see that our world has become a global village. Business, just like every other aspect, is going global as well. Since global conditions and international business is so independent on one another, risk and uncertainty have become big concerns. The measurement and management of "risk" has become one of the major concerns of all financial institutions and their regulators, especially since the collapse of Long Term Capital Management (LTCM) in 1998. (Janeway, n.d)
So we can see that in a globalized business world of today, a single event can create a chain reaction and affect many economies. Let us take the example of the Terrorist attacks of the September 11th, 2001 on the U.S. the country's sense of stability and security was completely turned around in just a few hours. Consumer demand plummeted worldwide. Everything from airlines to small businesses was impacted globally. International relations caused changes in trade and international business policies. No one city or country was affected, but the whole world felt the change. (Czinkota, n.d)
The debate on the distinction between the uncertainty and risk, that Knight discussed, is on going. Many economists argue that Knightian risk and uncertainty are one and the same and that both imply the same meaning. For example, they argue that in ...Show more


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