Want to keep learning?

This content is taken from the University of Groningen's online course, Decision Making in a Complex and Uncertain World. Join the course to learn more.

Skip to 0 minutes and 9 seconds In this lecture, we deal with risk. What is risk? Many consequences of our actions are not certain. Many consequences of our decisions are not certain. We have to make a distinction between a risk and uncertainty. In a situation of risk, a probability calculus is applicable. We can make calculations. We can quantify.

Skip to 0 minutes and 36 seconds It is not always possible. For this to be possible, we need to know all the possible consequences of a decision. We need to know all the possible consequences of an action. Let’s take an example. Take a coin. When you throw a coin, you know that there are two possible outcomes, head or tail. No more, no less. The only thing we do not know is whether it will be head or tail. This allows us to make all kinds of calculations. If you throw a coin once, you know the probability of throwing head is 50%. But you could make more complicated calculations.

Skip to 1 minute and 23 seconds Let’s for example, throw the coin twice, then you have four possible outcomes– head and head, head and tail, tail and head, and tail and tail. And this allows you to calculate. For example, we can ask what is the probability of at least throwing one head. And we can easily see that in the four possible outcomes, there are three times a head, so that’s 75%.

Skip to 2 minutes and 1 second So that’s making calculations. It is important to make a difference between the frequency and a so-called logical theory of probability.

Skip to 2 minutes and 14 seconds Probability as a frequency is based on counting the number of particular instances relative to the overall number of instances. Frequency is an empirical, observable aspect of reality. So let’s take an example to make this clear. Let’s assume that we have a number of houses in a certain country, and we would like to know what a probability is that one of the houses or more than one of the houses burns down. So imagine that you have a row, a list of all the possible houses. Let’s assume that there are 100. Out of the 100, let’s assume two will burn down. So then the probability is a frequency, it’s two. The houses that burn down over the total number of houses, 100.

Skip to 3 minutes and 11 seconds So that’s the frequency aspect of probability. Logical probability is something very different. It’s not an empirical aspect of reality. It has to do with a statement. You make a certain statement and you look at the overall evidence that you have in favour and against that statement. And the probability is to balance between all the evidence and the evidence in favour of a certain statement. So that’s the logical probability theory.

Skip to 3 minutes and 52 seconds Then a further important distinction is the one between objective and subjective view of probability.

Skip to 4 minutes and 2 seconds An objective view of probability is independent of an individual that’s making a probability judgement . Objective probability is based on the evidence that you have available, and different people having the same evidence would attach the same probability to a certain event or to a certain statement.

Skip to 4 minutes and 30 seconds In subjective case of probability, that may be different for different individuals. Individuals that have the same information can nevertheless attach a different probability to the same statement or to the same event.

Skip to 4 minutes and 50 seconds We have distinguished between a frequency and a logical theory of probability. Probability based on frequency is objective. It’s an objective characteristic of reality.

Skip to 5 minutes and 5 seconds Logical probability may be both, may both be subjective and objective.

Skip to 5 minutes and 14 seconds In this lecture, we have defined risk and uncertainty, and we have seen how we can calculate risk and under what circumstances we can calculate risk.

Introducing risk

In this course we make a distinction between risk and uncertainty.

This first lecture about the subject of uncertainty will re-introduce the familiar notion of risk. Later in this activity we will introduce fundamental uncertainty. But first we ask other questions: What is risk? How does it differ from uncertainty? What is logical probability, frequency probability theory and objective and subjective probability?

Please note that the concept of risk is used in many different fields and has different meanings. In this course we will continue to refer to risk as it is introduced in this video lecture. In later steps we will talk about the concept of uncertainty and how it is different from risk.

Share this video:

This video is from the free online course:

Decision Making in a Complex and Uncertain World

University of Groningen

Get a taste of this course

Find out what this course is like by previewing some of the course steps before you join: