The broadcast and cable news programs often feature analysts and businesspeople lamenting the fact that there is so much “uncertainty” in the economy, perpetuating our stagnant economic conditions. I have routinely fought against this characterization because there are so many facts within the economic situation and data that have great certainty, both statistical and experiential. These facts can aid managers and owners in making decisions, even the unpleasant ones. Those decisions, the ones that seem to be selection of the least bad alternative, have a logic to them that is based on what is known at a particular point in time augmented by the experience of that executive. What is known at any point in time is always flawed, and experiences often don’t seem broad or deep enough in a changing economy. All decisions include aspects of risk or uncertainty, or both.

How does uncertainty differ from risk? Risk is something that can be calculated. This is why there can be a product like insurance: actuarial math is the tool used to measure risk. In judging credit risk, actuarial work can determine the best prospects for reliable payback. Without statistical tools that measure and forecast risk, insurance is not possible. Insurance is purchased for low likelihood events that can have dire consequences. An example would be a family who insures against potential loss of earnings should a wage earner die unexpectedly. This insurance provides future earnings of that wage earner to others. The likelihood of accidental death is low, but the financial consequences, especially if there are young children, can create unwanted situations of great magnitude. Risk is an admission that bad outcomes can be measured and forecast because there is some regularity to them. And even when there is not, the risk of getting that process wrong can be insured, too. Another example would be the severe droughts in the Midwest and the use of crop insurance to cover at least some of the losses incurred as a result of the unexpected drought situation.

Uncertainty, however, is more personal. It is often better defined as the fear of regret over a commitment of resources and the long-term resulting outcome. These kinds of things cannot be insured, because they involve the decisions and acts of people about a future outcome that is not common with respect to the overall population. Uncertainty is the fear of regret of the person making the decisions. The likelihood of a downside mistake can feel like a risk that is too large to take.