Do you think profit is the reward for risk taking and uncertainty bearing?

As usual, a ‘Smart’ Question! Thank you so much Mr.  Shahul Hameed Mohammad.

First of all, let's see what the 'Uncertainty Theory Of Profit' is and then decide whether or not profit is the reward for risk taking and uncertainty bearing.

The 'Uncertainty Theory Of Profit' is propounded by ‘Knight’. According to this theory, profit is reward for bearing uncertainty. Uncertainty is due to unforeseeable or non insurable risk. According to Knight, there are two types of risk; they are foreseeable and unforeseeable. Some risks are of such a nature that they can be anticipated to a fair degree of accuracy, e.g. the risk of death, accident, etc. and so can be insured in return for premium. The entrepreneur can include the payment made in the form of premium in the total cost of production. So such risks which can be calculated and insured should not entitle the entrepreneur to a profit. On the other hand, there are some risks which are unpredictable and unforeseen and so they are non-insurable. There are mainly four types of non insurable risk which are as under:

1.       Risk due to competitors: Any business firm has the risk due to increase in number of competitors, change in their marketing strategies, improvement in their quality and management, decrease in their cost of production per unit etc. This risk is not avoidable with insurance.

2.       Risk due to change in policy of government: The government may change its policy related to investment, export, import, taxes, and so on. Due to it, any firm may suffer loss. This risk is not avoidable with insurance.

3.       Risk due to trade cycle: During recession and depression, most of the business firms suffer loss. This risk is not avoidable with insurance.

4.       Risk due to technological change: Technology advances with flight of time. If any firm fails to adjust the change in technology, the firm suffers loss. This risk is also not avoidable with insurance.

So, after having a cursory glance at the different aspects of this theory, I can raise the following points which the Critics of this theory have been ardently advocating and I, also, am in AGREEMENT with their viewpoint:

1.       Not direct relation between profit and uncertainty: Profit is not directly related to uncertainty. If the business involves high risk, there is more probability of failure and loss rather than profit.

2.       Profit is reward for avoidance of uncertainty: Profits earned only if uncertainty is successfully avoided using skills, education, knowledge, experiences and so on. It is not earned mere taking uncertainty.

3.       Uncertainty is not factor of production: According to this theory, uncertainty seems to be the factor of production but factor of production is organization not uncertainty.

4.       Reward for all things performed by organization: Organization earns profit not only taking uncertainty but for all things it performs. They are innovation, effective combination of inputs, use of skills knowledge etc and bargaining power.

The profit target is paramount: any economic system survives and thrives only if the companies and the State exude an added value compared to the cost of production,

Without profit, the degraded tool is not replaced, the future development is not assured, labor incomes stagnate.

The contractor who decides to set up a company agrees to run a number of risks.

• industrial risk
• commercial risk
• human risk
• financial risk

The risk can be accommodated in each major business function: the production - sales - Management - Financial

 Thank you Mr. Shahul  for invitation , All answers given herein are wonderful.

No doubt in it. One point of view is that, Profit and Risk are directly proportional to each other. My 2 cents. Thanks.

Thanks

Yes, it is

I support answers given by Mrs. Farhana & colleague Gayasuddin

To Begin with, In my opinion profits are not only defined as financial gains that are excess to costs and assigned allocations of finances to a certain entity.. Profits are also the gain of information, the accumulation of a confident customer base, as well as building brand recognition and stakeholder trust in a working organization. Financially risk taking is one of the strongest attitudes that an entrepreneur and an intreprenuer have or acquire , as it establishes opportunities that can have massive gains , so yes it can be considered to be a strong trait of effective profit-driven leadership. It is essential though to evaluate the risk bearing strategies and actions beforehand as its feasibility and potential growth properties must be reviewed and must not be overshadowed by the prospect of profit only, your company has employees and also (social, ethical, stakeholder) responsibilities that are equally important to financial gain. In my opinion an effective and simple strategy to evaluate and consider risks is by using a decision tree diagram and porters driving/restraining forces diagram.. this will give you a clearer picture. I hope i helped with your question !

Profit is part of the reward

Self-realization is also

And fame

And success

Of course ! Otherwise “A bird in the hand is worth two in the bush” told 2000 yrs ago become questionable.

Agree on experts answers. Thanks for your invitation.

Many wonderful answers are already herein. thank you 

Yes Of Course

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