Knowledge theorists claim that risk management is essentially the management of error, equivocality, risk, and uncertainty. Lack of information results in uncertainty, where the outcome cannot be calculated even at random. As information is gathered, this uncertainty changes into risk, where the outcome may be estimated. Risk management offers a way to reduce risk when market information and potential consequences become more apparent. Conflicting interpretations and the ensuing lack of judgement lead to ambiguity. Even with sufficient understanding of the circumstances, this still occurs. For this reason, banking and other institutions create incentive systems to handle agency issues in the risk-reward framework, control systems to reduce errors, information systems to reduce uncertainty, and cultural systems to deal with ambiguity.
Keywords: Risk Management, Uncertainty, Financial System, Economy.
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