Risk tolerance vs. uncertainty

People often show a difference in their ability to tolerate risk compared to their tolerance for uncertainty.

Although both concepts imply ignorance about the future, risk is perceived differently from pure uncertainty, which influences decision making.

Defining Risk and Uncertainty

Risk refers to situations where the possible outcomes of an action are known, and probabilities (at least estimated) can be assigned to each of those outcomes.

For example, when betting on a game with clear rules, the odds of winning or losing are known.

Uncertainty, on the other hand, describes scenarios where the possible outcomes, their consequences, or the probabilities associated with them are unknown, ambiguous or impossible to estimate precisely. It is a more fundamental lack of information.

The Ball Box Experiment

A classic experiment illustrates this difference: two boxes are offered. Box A contains 50 red balls and 50 black balls.

Box B contains 100 balls, but the proportion of red and black balls is unknown. If a prize is won by drawing a red ball, the majority chooses Box A, where the risk is known (50% probability).

If the condition is then changed and a black ball is rewarded, many people will choose Box A again, which is irrational if it was assumed in the first play that Box B probably had fewer red balls (and therefore more black balls).

This behavior demonstrates an aversion to uncertainty: a situation of known risk (Box A) is preferred to one of unknown possibilities (Box B), even if the latter might be more favorable.

Real Life Implications

This aversion to the unknown explains why many people may take calculated risks in areas such as adventure sports (where the dangers are known and precautions are taken) but feel great fear when faced with vital decisions such as changing careers or starting a business, where the future is much more uncertain and the outcomes are difficult to predict.

The problem lies in the fact that most of the important decisions in life (choice of profession, partner, etc.)