Uncertainty

Uncertainty describes a condition in which the outcome of future events cannot be determined. In scientific terms, it stems from incomplete knowledge of a phenomenon, a piece of information, or a given situation. From this perspective, uncertainty is primarily the result of limited understanding and is considered subjective when it reflects human doubt. For example, an investor cannot be certain whether the price of a stock will rise or fall in the coming days. In some cases, however, uncertainty is objective - it arises from the inherent complexity of reality and the physical limits of prediction, regardless of human knowledge. A clear example is the inability to forecast, with high precision, the weather for a specific location and day a year in advance - a result of chaotic determinism.

Decision-making under uncertainty. In economics, uncertainty plays a central role in the decision-making processes of economic agents, who must make choices without full knowledge of the relevant variables. This has led to the development of a dedicated field within political economy - decision theory - which studies how decisions are made when outcomes are uncertain. There are two key forms of uncertainty:

• Epistemic (or weak) uncertainty. The decision-maker knows the probability distribution of future events or states of the world.
• Ontological (or strong) uncertainty. The decision-maker lacks any knowledge of the probability distribution governing future events or states.

Risk vs. uncertainty. Although often used interchangeably, in economics, risk refers to a specific type of uncertainty that can be quantified - where probabilities can be assigned to possible outcomes - and is typically associated with potential losses or adverse consequences. This distinction is particularly important in the insurance sector, where only measurable uncertainties qualify for coverage.

While uncertainty always involves the unknown, its meaning varies depending on the field of application. The term is widely used in economics, science, physics, statistics, finance, psychology, insurance, engineering, and sociology. In scientific contexts, “uncertainty” often serves as a synonym for measurement error.