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Risk and Uncertainty of Information
[edit]Fluctuations in the availability and accuracy of information can induce some level of risk and uncertainty.
Difference between Risk and Uncertainty
[edit]Risk is defined by the circumstances under which the probability of every outcome is known by the decision-making individual and that, among all possible outcomes, it is not fully certain which will occur. [1] In contrast, uncertainty refers to the situation whereby the probability of every outcome is unknown and cannot be accurately estimated thus, individuals will often lack sufficient economic information to make an informed decision. [2]
Risk Attitudes
[edit]Risk attitude directly influences the behaviour of economic agents during decision-making under uncertainty by altering the individuals’ perception towards the valuation and reliability of information within the market. [3] Stakeholders, particularly managers, will often demonstrate different risk attitudes which dictate their decision-making towards a variety of investments.
Risk attitude is classified under three main categories: risk aversion, risk neutrality and risk-seeking dispositions.
Risk aversion managers have a tendency to prefer investments with a low degree of uncertainty that generates relatively lower expected returns, as opposed to those with a high degree of uncertainty that generates relatively higher expected returns. [4] They are more likely to choose a decision with a guaranteed outcome that has minimal risk, even if that meant foregoing a payoff that is potentially higher.
Risk neutral preferences managers primarily focus on maximising the expected outcome irrespective of the level of risk. This indifference fuels their inclination to pursue risky investment decisions only if the potential payoff was greater than the potential losses. While, Risk-seeking managers have the tendency to prefer investments with the highest potential return, even if that decision meant undertaking a higher degree of risk.
- ^ Park, K. Francis (28 July 2017). Risk and Uncertainty - The Palgrave Encyclopedia of Strategic Management. London: Palgrave Macmillan. pp. 1–7. ISBN 978-1-349-94848-2.
- ^ Park, K. Francis (28 July 2017). Risk and Uncertainty - The Palgrave Encyclopedia of Strategic Management. London: Palgrave Macmillan. pp. 1–7. ISBN 978-1-349-94848-2.
- ^ Wijayaratna, Kasun; Dixit, Vinayak (September 2016). "Impact of information on risk attitudes: Implications on valuation of reliability and information". Journal of Choice Modelling. doi:10.1016/j.jocm.2016.09.004.
- ^ Werner, Jan (17 August 2017). Risk Aversion - The New Palgrave Dictionary of Economics. London: Palgrave Macmillan. ISBN 978-0-333-78676-5.