ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Risk is the situation under which the decision outcomes and their probabilities of occurrences are known to the decision-maker, and uncertainty is the situation under which such information is not available to the decision-maker.

Detailed explanation-2: -b. False. Risk refers to a situation in which the probability of each possible outcome to a decision is unknown or meaningless.

Detailed explanation-3: -Risk and uncertainty are related in that both preclude knowledge of future states and both may be described by probabilities. It is important, however, to distinguish whether a lack of predictabiity arises from insufficient knowledge (uncertainty) or from a well-understood probabilistic process (risk).

Detailed explanation-4: -Risk and uncertainty are definitely two separate areas. A risk event can be identified and described and a decision made about what action, if any, can be taken to manage it – either the event or the effect. The short-hand definition of risk as the ‘known unknown’. Uncertainty is the ‘unknown unknown’.

Detailed explanation-5: -There are various types of measures seeking to estimate risk and uncertainty: [1] realized and derivatives-implied distributions of returns across assets, [2] news-based measures of policy and political uncertainty, [3] survey-based indicators, [4] econometric measures, and [5] ambiguity indices.