Excerpted from Wikipedia
Source: https://en.wikipedia.org/wiki/Uncertainty
Date: 12-Oct-2015
Uncertainty is a situation that involves imperfect and/or unknown information. In other words it is a term used in subtly different ways in a number of fields, including insurance, philosophy, physics, statistics, economics, finance, psychology, sociology, engineering, meteorology, and information science. It applies to predictions of future events, to physical measurements that are already made, or to the unknown. Uncertainty arises in partially observable and/or stochastic environments, as well as due to ignorance and/or indolence.
Concepts
Although the terms are used in various ways among the general public, many specialists in decision theory, statistics and other quantitative fields have defined uncertainty, risk, and their measurement as:
Uncertainty: The lack of certainty. A state of having limited knowledge where it is impossible to exactly describe the existing state, a future outcome, or more than one possible outcome.
Measurement of Uncertainty: A set of possible states or outcomes where probabilities are assigned to each possible state or outcome – this also includes the application of a probability density function to continuous variable
Risk: A state of uncertainty where some possible outcomes have an undesired effect or significant loss.
Measurement of Risk: A set of measured uncertainties where some possible outcomes are losses, and the magnitudes of those losses
“There are some things that you know to be true, and others that you know to be false; yet, despite this extensive knowledge that you have, there remain many things whose truth or falsity is not known to you. We say that you are uncertain about them. You are uncertain, to varying degrees, about everything in the future; much of the past is hidden from you; and there is a lot of the present about which you do not have full information. Uncertainty is everywhere and you cannot escape from it.”
– Dennis Lindley, Understanding Uncertainty (2006)
Applications
- Investing in financial markets such as the stock market.
- Uncertainty or error is used in science and engineering notation. Numerical values should only be expressed to those digits that are physically meaningful, which are referred to as significant figures. Uncertainty is involved in every measurement, such as measuring a distance, a temperature, etc., the degree depending upon the instrument or technique used to make the measurement. Similarly, uncertainty is propagated through calculations so that the calculated value has some degree of uncertainty depending upon the uncertainties of the measured values and the equation used in the calculation.
- Uncertainty is designed into games, most notably in gambling, where chance is central to play.
- In scientific modelling, in which the prediction of future events should be understood to have a range of expected values.
- In physics, the Heisenberg uncertainty principle forms the basis of modern quantum mechanics.
- In weather forecasting it is now commonplace to include data on the degree of uncertainty in a weather forecast.
- Uncertainty is often an important factor in economics. According to economist Frank Knight, it is different from risk, where there is a specific probability assigned to each outcome (as when flipping a fair coin). Uncertainty involves a situation that has unknown probabilities, while the estimated probabilities of possible outcomes need not add to unity.