We are currently living in uncertainty. We don’t know when these panic times will end. The COVID-19 is a Pandemic. People are dying; the virus is infecting hundreds if not thousands every day. The stock exchanges are falling everywhere, and every federal central bank trial to drop the interest rate is not helping.
Every day we need to make hundreds of critical decisions, and there are big decisions that might determine our near and future existence. Not only that, sometimes we are not making decisions for just ourselves, but the people around us. You might be a parent, partner, founder, or leader. It’s your responsibility to make the right decisions in such difficult situations. And it’s your responsibility to know how to make the right decisions.
Decision making is such extreme conditions are called decision making in uncertainty. But first, we need to define uncertainty.
Any decision-making process falls between two extreme cases depending on our level of knowledge about the outcome of our actions. One side of this scale is deterministic, where we have full knowledge; the opposite is deep uncertainty, where we are in complete ignorance. Between these two extremes lies the risk, where we have some knowledge but not all of it.
A risky situation is when we understand the system, know the consequences, and can quantify the probability. For example, you want to invest in a new start-up, and the likelihood of success is 50%. That carries more risk than if the success rate is 70%; however, if you have a savings account with a 2% fixed annual rate, that brings a theoretical 0% risk.
Uncertainty is when we know the system and the consequences, but we don’t know the probability. This is the current situations in COVID-19. We know the virus, we mostly know how it spreads, and how to detect it. We know the consequences, best-case scenarios, worst-case scenarios, and all the dark shades in between. But we don’t know its vaccine nor its treatment. And above all, we didn’t know when it did hit us all, really bad.
Another example of uncertainty, when it comes to a tsunami in Bali or terrorists attack in any part of the world, we know the danger is out there. We know the consequences, but we don’t know the probability. These are all uncertain situations.
Deep uncertainty is a more extreme term, and it means we don’t know the system, the nature of the consequences, or when or why they happen—this is complete ignorance.
These situations are also known by different terms. For example, in 2002, Donald Rumsfeld responded to a journalist who was suggesting the absence of a link between Saddam Hussein’s regime and terrorists seeking weapons of mass destruction. He said:
“Reports that say something hasn’t happened are always interesting to me because as we know, there are known knowns: there are things we know we know. We also know there are known unknowns: that is to say we know there are some things [we know] we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult one.” [1]
On the other side, Dr. Mohamed ElBaradei, Director General of International Atomic Energy Agency in March 2003, reported before the Iraq invasion:
“After three months of intrusive inspections, we have to date found no evidence or plausible indication of the revival of a nuclear weapons program in Iraq.” [2]
Aside from that, Iraq didn’t have weapons of mass destruction, if you google the term “known unknown” you will find more than 1.000,000 entries, many linked to Rumsfeld’s quote.
Likewise, the term “Black Swan theory” is used to describe some of these situations. It was coined by Nassim Taleb to describe significant events that come as a surprise with a very low probability to happen and no frequent prior incidents. Black Swan because it refers to the incorrect old belief that black swans don’t exist. Taleb says that you always have to expect a black swan event and prepare for it. A classic black swan event was the financial crisis in 2008.[3]
Now I think that the classic example for a Black Swan event would be the COVID-19 Pandemic.
In the following articles I will explore more deeply into the meaning of uncertainty and how to make decision through tough times.
[1] Known and Unknown: Author’s Note » About » The Rumsfeld Papers n.d. http://papers.rumsfeld.com/about/page/authors-note (accessed October 29, 2017).
[2] The Status of Nuclear Inspections in Iraq: An Update | IAEA n.d. https://www.iaea.org/newscenter/statements/status-nuclear-inspections-iraq-update (accessed October 29, 2017).
[3] Taleb NN. The Black Swan: Second Edition: The Impact of the Highly Improbable Fragility”. Random House Publishing Group; 2010.
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