Uncertainty theory was propounded by the American economist Frank H.Knight. Profit is the reward for “ uncertainty bearing”. He distinguishes between “ Insurable” and “non – insurable” risks.

Insurable Risks:

1. Certain risks are measurable or calculable. 

2. Some of the examples of these risks are the risk of fire, theft and natural disasters. 

3. Such risks are compensated by the Insurance companies.

Non – Insurable Risks:

1. There are some risks which are immeasurable or incalculable.

2. The examples of these risks are competition, market condition, technology change and public policy. 

3. No Insurance Company can undertake these risks. 

4. The term “risks” covers the first type of events (measurable – insurable) 

5. The term “uncertainty” covers the second type of events (unforeseeable or incalculable or not measurable or noninsurable).

6. According to Knight, profit does not arise. 

7. On account of risk-taking, because the entrepreneur can guard himself against a risk by taking a suitable insurance policy. 

8. Uncertain events cannot be guarded against in that way. 

9. An entrepreneur takes himself the burden of facing an uncertain event, he secures remuneration.

10. That remuneration is “profit”.