Q.Distinguish between risk and uncertainty as explained by Frank Knight in the context of entrepreneurship.

This distinction is central to Frank Knight's theory of why entrepreneurial profit is justified.

Knight argued that ordinary business risks, whose probability can be estimated (such as fire or theft), can be insured against and are not, by themselves, what justifies entrepreneurial profit. It is the bearing of genuine UNCERTAINTY — outcomes that cannot be measured or predicted in advance, such as whether a new product will succeed in the market — that Knight identified a …

The economist Frank Knight drew a sharp and influential distinction between 'risk' and 'uncertainty' in explaining what, exactly, an entrepreneur is being rewarded for when the enterprise earns a profit.

Risk, in Knight's sense, refers to a possible loss whose probability CAN be estimated or measured in advance — based on past data, known statistical patterns, or actuarial calculation. Because its likelihood is knowable, risk of this kind CAN be insured against: a factory owner can buy fire insurance because the probability of a fire, across many similar factories, can be estimated with reasonable accuracy.

Uncertainty, in Knight's sense, refers to a possible future outcome that CANNOT be measured or estimated in advance, because the situation is genuinely novel or unique — there is no reliable body of past data to calculate a probability from. Because it cannot be measured, uncertainty of this kind CANNOT be insured against: no insurer can meaningfully price a policy against the possibility that a brand-new product will fail to find a market, because there is no comparable past data to base a premium on. …