---
id: uncertainty
aliases: []
tags:
  - topic/risk
---
# Uncertainty

The term "uncertainty" refers to the possibility of multiple outcomes.

## Information

In statistical inference and [[strategy]],
**information** is the resolution of uncertainty.

### Value of Information

> [!quote]
> **Value of information** (VOI or VoI)
> is the amount a decision maker would be willing to pay
> for information prior to making a decision.

It is the value of the reduction in uncertainty
that the information provides.

In a monetary context, it is the reduction of
expected opportunity loss.

$$
\text{EVI} = \text{EOL} - \text{EOL}|I
$$

### Expected Value of Perfect Information

Expected value of perfect information (EVPI)
is the price that one would be willing to pay
in order to gain access to perfect information.

> [!info] Perfect Information
> Perfect information is hypothetical information
> that would eliminate all uncertainty.

The perceived _value_ of decreased uncertainty
must be weighed against its _cost_.

#### In Construction Estimating

This concept provides the basis for the solution
of one or more [[open-problems-in-estimating]].
To reduce [[risk]] in [[construction-estimating]],
an organization pays in estimator hours.
These hours have a direct cost in salary and benefits,
however the greater cost is the opportunity cost
of tying up an estimator who could otherwise be starting a new project.

In many cases, the utility of doubled throughput
far outweighs the increased risk of individual bids.

## Types of Uncertainty

### Aleatory Uncertainty

> [!info] Also Known As
> * statistical uncertainty
> * stochastic uncertainty
> * random error

Aleatory uncertainty is inherent randomness in data that can't be explained away.

### Epistemic Uncertainty

> [!info] Also Known As
> * systematic uncertainty
> * model uncertainty

Epistemic uncertainty is that which arises from a lack of knowledge,
and can be eliminated with access to [[#information]].
