Risk and Uncertainty in Production Economics

Abstract

One of the most celebrated and feared concepts in the World today are risk which is the product of uncertainty. Risk and uncertainty are often used interchangeably by many economists as if they are the same thing, but it is not true. While risk can be measured and estimated, and even ensured, uncertainty can not. Uncertainty is the complete ignorance of the future and there is no amount of technical adjustment or mathematically finesse that can change our basic ignorance of the future. However, risk and uncertainty can not be separated because where there is uncertainty, there is risk. The probability of risk can be measured objectively, while that of the uncertainty can only be measured through the subjective probability depending on the marginal utility of money of an individual. For some individuals marginal utility of money will be increasing, for some others, it will be decreasing and yet for others it will be constant. Thus we have risk lovers or risk seekers with increasing marginal utility of money, followed by the risk averters with decreasing marginal utility of money and lastly the risk neutral with constant marginal utility of money. The investment decisions are based principally on the attributes of these three classes of decision makers because the higher the risk the higher is the returns and vice-versa. The paper also examines the causes of low investment in Nigeria by Nigerians as well as other nationals to include corruption and unfavourable macroeconomic environment in Nigeria. The paper is concluded with series of recommendations on how to curb corruption, enthrone good governance, transparency, accountability, Rule of Law and reducing risky environment existing in Nigeria so as to attract both local and foreign investors.