Research Letter #18


"It is my view that most individuals underestimate the uncertainty of the world. This is almost as true of economists and other specialists as it is of the lay public."

(Kenneth Arrow, Nobel Prize Winner in Economics 1972; in Arrow (1992)).

"Risk ... a measurable uncertainty" (attributed to Frank H. Knight, another economist, writing in "the first work of any importance .. that deals explicitly with decision-making under conditions of uncertainty"; in Bernstein, 1998, p.219)

"Risk management has created the illusion that risk can be quantified on the basis of probability, exposure to risk, and from the likely consequences of accidents occurring." (Pitzer 1999). [My emphasis.]

Uncertainty is an everyday experience. Uncertainty affects us during our routines - Will the bus arrive on time? - and in the big questions of life - Does God exist? Uncertainty lurks at every corner in the world of bushfires too whether it is in relation to the weather, fire behaviour, threats to the environment or to built assets, or human behaviour in the face of fire. We, as a society and as individuals, often try to reduce uncertainties in the hope of reducing stress or of improving efficiency. Whatever we do we will never eliminate uncertainty from everything. Uncertainty is inevitable. The degree of uncertainty varies and, in some cases, can be reduced.

Uncertainty has taken on a new garb as new ways of measuring it have been invented. If we accept the definition of Knight above (Bernstein 1998), measurement turns 'uncertainty' into 'risk'. Bernstein has written a most readable history of the subject of risk including the roles of brilliant mathematicians and other thinkers throughout the ages. Today, 'risk assessment' is in vogue whether the setting be the stock market, standards of fire cover (e.g. how many fire tankers you should have), fire-threat analysis (e.g. danger to houses from bushfires) or natural resource management. Risk assessment and management is a growth industry to the extent that there is now an Australian standard for the subject (Standards Australia 1999).

The subject ‘risk management’ uses words like ‘risk’ and ‘hazard’ that have been used interchangeably in the literature. Whenever you meet these words it is as well to be careful in trying to decide what is meant. Sometimes there is an explanation. Some dictionaries, however, treat ‘risk’ and ‘hazard’ as synonyms. There is no disagreement that both ‘risk’ and ‘hazard’ refer to negative outcomes.

Consider the case of the probability of a fire occurring at a point in the landscape. This can be the first step in estimating the ‘risk’ to assets posed by a ‘hazard’ - bushfire. Notice that a bushfire may be a ‘hazard’ as far as house survival is concerned but not necessarily so to a species of plant or animal (see Bradstock and Gill 1999). Knowing the probability of fire at a point can be an important figure economically, socially and ecologically.

When you are looking at an estimate of ‘risk’, it is as well to consider the definition of the word, how it was calculated, the quality and extent of the data used, the number and nature of explanatory variables (have any variables been missed?) and how the estimate might fluctuate from year to year.

The calculation of risk carries many uncertainties, so beware!

Literature cited

Malcolm Gill
24 February 2000