UNCERTAINTY MINIMIZED
Berkshire Hathaway Inc.

Warren Buffett is the richest man in America.  Buffett began purchasing shares in an ailing textile company called Berkshire Hathaway in 1962.  In 1967, he merged two insurance companies into Berkshire, and began the company's phenomenal growth.  By 1993, Warren Buffett had amassed a personal fortune of over $8 billion. 

It is fitting that insurance has been the core of Berkshire's business.  As an investor, Warren Buffett has a policy of eliminating or minimizing risk.  He does this by concentrating on a very few holdings, and being very careful and thorough in his research.  As an insurer, Berkshire maintains an investment portfolio (float) three times the industry average. 

Berkshire Hathaway is an example of a company with a policy of minimizing uncertainty.  Warren Buffett's risks are low because he maximizes the use of thorough research, planning, insurance, statistical process controls and tax reserves.
 

SOME UNCERTAINTY
Caterpillar Inc.

Caterpillar Tractor Co. was established in 1925.  The company pioneered the development of heavy-duty diesel engine technology.  Caterpillar based its growth on a policy of selling reliable equipment and providing worldwide parts and service to keep that equipment running.  By 1980 the company had enjoyed 50 consecutive years of profits and returns on shareholders' equity as high as 27%.  Caterpillar is noted for its conservative and risk avoiding business operations. 

However, between 1980 and 1987 two factors forced Caterpillar to the brink of bankruptcy: the US dollar rose by an average of 87% against the currencies of most other industrialized countries; and a worldwide slowdown in large construction projects occurred.

Caterpillar is an example of a company that has endeavored to manage risk, but is still left with some uncertainty.  Overall risk management is medium, since there are some risks which cannot be laid off.
 

EXTREME UNCERTAINTY
Barings Bank

The Kobe earthquake of 1995 brought down more than just buildings.  It also caused the collapse of one of England's oldest and most venerable banks: Barings Bank.

Barings Bank was brought down by the bankruptcy of one of its divisions: Barings Futures in Singapore.  Barings Futures originally set out to trade derivatives in a low risk, but very profitable arbitrage strategy.  Derivatives are formed by separating the risk portion from the underlying security and trading this derived element as a separate entity.

In January of 1995, one of Barings traders: Nicholas Leeson began to make big bets that Japan's stock market would rise, and its bond prices would fall.  Barings management ignored warning signs of his dangerously risky position out of a reluctance to interfere with Leeson's long record of highly profitable trading.  On January 17, 1995 the Kobe earthquake hit causing Japan's stock market prices to tumble.  Bond prices remained steady, and so failed to offset Leeson's losses on stocks.  By the time Leeson threw in the towel and fled Singapore, Barings losses stood at $1 billion.

The failure of Barings Bank is an example of a company not managing extreme uncertainty.  The trading of derivatives is an extremely uncertain business, and there was no insurance, reporting systems, contingency funds, or tax planning in place to cover potential losses.