What distinguishes speculative risk from pure risk?

Speculative risk is characterized by the potential for both loss and gain, which sets it apart from pure risk. In speculative risk scenarios, individuals or businesses engage in activities where there is uncertainty regarding the outcomes, but they have the chance to achieve positive results, such as profit. This dual nature of risk allows for different decisions and strategies, as people can choose to participate in ventures with the possibility of financial gain, while also acknowledging the risk of loss.

For instance, investing in the stock market, starting a business, or betting on a sporting event are examples of speculative risks where one could either end up losing money or making a profit. This is distinct from pure risk, which only involves the possibility of loss without any potential for benefit or gain, such as the risk of theft, fire, or natural disasters. Understanding this distinction is crucial for individuals and entities when assessing the types of risks they face and how to manage them effectively.