---
title: "Define certainty, uncertainty and risk"
subject: "Engineering Economics"
chapter: 6
key: "semester_6/engineering_economics:certainty-uncertainty-risk-define"
source: https://www.bctengineer.com/q/semester_6/engineering_economics/certainty-uncertainty-risk-define
site: BCT Engineering
---

# Define certainty, uncertainty and risk

Engineering Economics · Chapter 6: Risk Analysis

- Asked in: 2065 Chaitra, 4 marks
- Video: [Risk And Uncertainty | Types | Project Management & Entrepreneurship | Unit 4 | AKTU Exam Notes](https://www.youtube.com/watch?v=dKvZPpUZHsA) — KESHARWANI ACADEMY
- Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14
- Page: https://www.bctengineer.com/q/semester_6/engineering_economics/certainty-uncertainty-risk-define
- Whole chapter: https://www.bctengineer.com/md/semester_6/engineering_economics/chapter-6

## Question

Define the concept of certainty, uncertainty and risk.

## Short answer

Certainty means outcomes are known exactly. Risk exists when possible outcomes and their probabilities are known, enabling expected value analysis. Uncertaintiy occurs when probabilities are unknown or outcomes are not fully defined, requiring judgement and sensitivity analysis.

## Answer

#### Certainty
Certainty means that the outcome of a decision is known exactly in advance: the cash flows, lives and interest rates are known with no doubt. Example: a bank fixed deposit of Rs 1,00,000 at 10% will give exactly Rs 1,10,000 after one year. Standard engineering economy techniques (PW, AW, IRR) assume this condition.

#### Risk
Risk exists when the outcome is not certain, but all possible outcomes and their probabilities are known or can be estimated (from past data or experience). The decision maker can then use expected values and variance.
Example: a machine will give annual savings of Rs 50,000 with probability 0.6, Rs 30,000 with probability 0.3 and Rs 10,000 with probability 0.1, so the expected saving = 0.6(50,000) + 0.3(30,000) + 0.1(10,000) = Rs 40,000.

#### Uncertainty
Uncertainty exists when more than one outcome is possible but the probabilities cannot be estimated reliably (or even the outcomes are not fully known). The decision is made using judgement, sensitivity analysis or rules such as maximin, maximax and minimax regret.
Example: the market response to a completely new type of product, or the effect of future government policy.

| Basis | Certainty | Risk | Uncertainty |
|---|---|---|---|
| Outcomes | One, known | Several, known | Several, may be unknown |
| Probabilities | Not needed (p = 1) | Known | Not known |
| Tool | PW, AW, IRR | Expected value, decision tree | Sensitivity, scenario analysis |

In practice most engineering projects are decided under risk or uncertainty, because they are based on forecasts.

## Check yourself

The answer's key points as multiple-choice questions, with the correct option and why.

1. What defines decision-making under certainty?
   A. The outcome is known exactly in advance
   B. Outcomes are known but with probabilities
   C. Several outcomes are possible with unknown probabilities
   D. Outcomes are unknown but the expected value is computed
   Answer: A. Under certainty cash flows, lives and rates are known without doubt, as in a fixed deposit. (Key point: Certainty)

2. What distinguishes risk from uncertainty?
   A. In risk only one outcome is possible
   B. In risk the possible outcomes and their probabilities are known or estimable
   C. In risk probabilities cannot be estimated
   D. In risk outcomes are always unknown
   Answer: B. Risk allows expected value and variance because probabilities are available; uncertainty lacks reliable probabilities. (Key point: Risk)

3. A machine saves Rs 50,000 (p=0.6), Rs 30,000 (p=0.3), Rs 10,000 (p=0.1). What is the expected saving?
   A. Rs 30,000
   B. Rs 90,000
   C. Rs 40,000
   D. Rs 36,000
   Answer: C. 0.6(50,000) + 0.3(30,000) + 0.1(10,000) = 30,000 + 9,000 + 1,000 = 40,000. (Key point: Expected value)

4. Which tools suit decisions under uncertainty?
   A. Expected value and decision trees
   B. Only PW, AW and IRR
   C. Variance and standard deviation of known probabilities
   D. Sensitivity analysis, scenario analysis, maximin, maximax, minimax regret
   Answer: D. When probabilities are unknown, judgement and rules like maximin or sensitivity analysis are used. (Key point: Tools for uncertainty)

## Related in Engineering Economics

- [Methods for assessing risk and uncertainty](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Amethods-assessing-risk-uncertainty) — Engineering Economics, chapter 6