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Dealing with uncertainty

April 12, 2017

Uncertainty is very topical: research by the European Central Bank shows that 20% of market fluctuations are caused by uncertainty. In the UK one third of business owners admit that uncertainty ahead of Article 50 is their biggest concern. In Europe there is uncertainty over the outcome of elections this year in France, Holland and Germany. There is now even uncertainty about future cohesion of the member states of the EU as a trading bloc.

Add to this the uncertainty many Muslims feel about whether they will be welcome in the US under the new administration; plus the uncertainty British farmers feel about their future once EU farming subsidies are removed. The pound has fallen in value by 20% since the Brexit referendum, and food prices in the shops are beginning to rise. Producers, distributors and retailers having absorbed some of the increase to date, are finally passing it on to the consumer.

Our weekly shopping basket is beginning to feel expensive and families will buy less and switch products with inflation adding to our sense of un-affordability. Where does this leave the food supply chain for the EU and UK which have been inter-twined for over 40 years? How do you unbundle years of trade agreements on price controls, safety standards and quotas? The policy makers are no more certain about the future than the electorate, uncertainty ‘trumps’ all other worries.

What is uncertainty?

The future is unknown and unknowable, yet we treat uncertainty in different ways. Sometimes we reduce uncertainty through analysis or calculation, sometimes through guesswork or intuition. Governments and corporations buy forecasts from market analysts, economists and sociologists look for cycles and patterns which indicate a probable future outcome. There are millions of people in the Far East who consider astrology, or planet alignment, to have some bearing on the future. Everyone wants a coping strategy going forward.

The question is not how to remove uncertainty but how to reduce it, that is what early maritime insurance underwriters recognised when Lloyds was established in London in the 1690s. The history of the risk industry is bound up with how we respond to fear of an unknown future and the value we put on security through certainty. Some types of uncertainty can be reduced through careful analysis of available information, some by acquisition of supplementary information. These are either ‘known-knowns’ or ‘known-unknowns’.

Some types of uncertainty are harder to reduce as vital information remains unknown to us. We don’t recognise the type of information we need although it probably exists, we just don’t appreciate its relevance to our current dilemma, these are called ‘unknown-knowns’. The final and most difficult type of uncertainty to deal with is one that we haven’t even recognised yet. This falls beyond our comprehension and is not even identified as something we should know. A category Donald Rumsfeld succinctly called ‘unknown-unknowns’.

Dealing with uncertainty

To effectively reduce uncertainty we therefore need to recognise the appropriate cause of uncertainty and recognise where we need to focus attention to reduce uncertainty. The first type or ‘known-knowns’ just require a bit of analysis or interpretation of what we’ve already got. This is a kind of measurable uncertainty that can be reduced to an acceptable level of certainty.

The second type of uncertainty includes all ‘known-unknowns’. These highlight knowledge gaps like missing jigsaw pieces. We know what we don’t know in the sense that we appreciate and recognise the information needed to complete the picture, to provide insight necessary to make informed judgement. These missing pieces are known about although we don’t yet have them; this is why the known-unknowns can most usefully be called ‘jigsaw’ uncertainty.

The third type of uncertainty incorporates ‘unknown-knowns’. Here the uncertainty is caused because we fail to appreciate what is needed to complete the picture; this despite the existence of information to fill our knowledge gaps. The missing knowledge exists but we don’t appreciate it or have looked in the wrong place, hence it remains unknown to us. Data from political, economic, social or technical sources exist, but we just haven’t identified it as necessary.

The fourth type of uncertainty we call ‘unknown-unknowns’ are the uncertainties we don’t even acknowledge. The risks that never appear on the risk register because we haven’t even considered their possibility. Within this category lie many uncertainties that we don’t need to consider, but some we ought to. The only way to contemplate these is to think ‘outside the box’ and imagine ourselves from a completely different perspective. These are the hardest to reconcile.

Resolving problems

Uncertainty creates ambiguity and this creates problems for us. Keith Grint in his 2008 book ‘Wicked problems and clumsy solutions’ identified these three types. There are Tame problems which are answerable because a solution is attainable. There are Critical problems that require a leader to marshal resources necessary to solve the problem. Then there are Wicked problems.

Wicked problems are those where there is no answer, complex challenges that demand an enormous amount of resource and analytical competence to even begin to resolve. Much global uncertainty today falls into this category. Certainties on which two or three generations have relied are now no longer valid. What ‘trumps’ uncertainty ….better than anything? False certainty…. We need to learn how to live with risk without fear!

Written by Garry Honey, Chiron Risk CEO and SAMI Associate.

The views expressed are those of the author and not necessarily of SAMI Consulting.

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