Master the Art of Business
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The difference between Uncertainty and Risk is that Risks are known unknowns: you know what might happen. Uncertainties are unknown unknowns, there's no way to expect that that could happen.
You can't know if a something unexpected will occur, all you can do is remain flexible, prepared and Resilient to react properly.
What will interest rates look like 10 years from now? Where do you think the price of oil will be next year? How about that company stock-is it cheap, or overpriced? Is it better to stockpile raw materials now, or wait a few months? Businesspeople deal with questions like this daily.
Here's the answer to all of these questions: nobody knows.
This world of ours is a tremendously uncertain place, which is both a blessing and curse. Anything can happen, for good or ill-we simply can't know what's around the bend.
There's an enormous difference between risk and Uncertainty.
In the immortal words of former US Secretary of State Donald Rumsfeld:
There are known knowns. These are things we know that we know.
There are known unknowns. That is to say, there are things that we know we don't know.
But there are also unknown unknowns. These are things we don't know we don't know.
Risks are known unknowns.
If you're planning on picking up a friend from the airport, the probability that the flight will arrive several hours late is a risk-you know in advance that the arrival time can vary, and plan accordingly.
Uncertainties are unknown unknowns.
You may be late picking up your friend from the airport because a meteorite hits your car the night before you're scheduled to leave for the airport. Who could predict that?
You can't reliably predict the future based on past events in the face of Uncertainty. Unexpected or random events can occur suddenly, which can have major impacts on your goals and plans.
In The Black Swan, Nassim Nicholas Taleb, a former hedge fund manager, describes the perils of uncertainty. No matter how stable or predictable things seem, unpredictable "black swan events" can change everything in an instant.
The term "black swan" was a common expression in 16th century London for something that was impossible or didn't exist - everyone knew that all swans were white.
The problem with the term is what 18th century philospher David Hume called the "problem of induction": until you see every swan that exists, you can never assume the statement "all swans are white" is true. All it takes is one black swan to completely invalidate the hypothesis, which happened when black swans were documented in Australia in 1697 by Dutch sea-captain Willem de Vlamingh.
The moment before they happen, the probability of "black swan" events occurring is essentially zero. In the wake of a black swan event, the probability of it occurring is a moot point: these events change the Environment in which the system operates, altering Selection Tests without warning.
You can't know in advance what black swan events will occur: all you can do is be flexible, prepared, and Resilient enough to react appropriately when they occur.
Even the most detailed analysis with reams of historical data can't save you from Uncertainty.
The primary drawback of the financial models taught in most MBA programs is Uncertainty: your Pro Forma, NPV, or CAPM model is only as good as the quality of your predictions.
Many a business has been ruined based on financial predictions that turned out to be wrong. How likely is it that your 10-year financial projection predicts absolutely everything that will happen with 100% accuracy? Who says tomorrow is going to be anything like today?
Many people make a business of selling certainty, which doesn't exist. Prediction, forecasting, and other forms of business soothsaying are popular because they provide the illusion that the future is knowable and controllable.
Exercises in prediction aren't worth the cost-if there was a foolproof way to predict gas prices, interest rates, or stock prices, the people with that magic knowledge would be enormously wealthy, and would have no need to sell anything to you.
Absorbing the ever-present nature of Uncertainty is an exercise in seeing the world as it really is, not as we want it to be. Instinctually, we all want to feel like we know what will happen in the future, particularly given how prone we all are to Loss Aversion and Threat Lockdown.
Contemplating Uncertainty feels bad, because not knowing what's going to happen feels like a threat.
Instead of fixating on predicting invisible and unknowable threats, it's better to channel your energy into enhancing your ability to handle the unexpected. Don't rely on making accurate predictions-things can change at any time.
Planning for flexibility in response to uncertainty via Scenario Planning is far more useful than pretending to be a seer.
"He who lives by the crystal ball soon learns to eat ground glass."Edgar R. Fiedler, economist
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Master the Art of Business