A Model for Deciding under Risk and Uncertainty

Guest Post by Patrick Ow (first posted on CERM ® RISK INSIGHTS – reposted here with permission)

In Part 1, we looked at the two relevant dimensions for decision-making under certainty, risk, and uncertainty that form the certainty-uncertainty spectrum are:

1. Degree of certainty – It ranges from close to certainty to far from certainty.
2. Level of predictability and control – It moves from close to predictability and control to far from predictability and control.

In Part 2, we looked at the three conditions along the certainty-uncertainty spectrum that you will face when making decisions under certainty, risk, and uncertainty.

1. Making decisions under certainty (“I can acquire more reliable information”) – On one end of the certainty-uncertainty spectrum, you can acquire all available information and knowledge to reach a certain level of certainty and predictability. This will bring you closer to certainty and closer to predictability and control.
2. Making decisions under pure uncertainty (“I don’t know. Let’s work it out together.”) – On the other end of the certainty-uncertainty spectrum, you are ignorant or have absolutely no knowledge, not even about the likelihood of occurrence for an event. Your behavior is purely based on your attitude towards the unknown. You are far from certainty and far from predictability and control. Acknowledging uncertainty and not knowing are the first step in getting closer to what is ‘certain’ or true.
3. Making decisions under risk (“I know the probability estimates”) – Somewhere in-between the two ends of the certainty-uncertainty spectrum, you can acquire some information to improve your knowledge and help you decide and take action. You use the best available information to assign subjective probability and consequence estimates for the occurrence of each state. It may not be perfect, but it does the job.

In this final Part 3, we are going to look at a model for deciding under risk and uncertainty

Journalist, author, and podcaster Scott Young discussed a good model for making a decision under risk (uncertainty) that focuses on four distinct but related areas:

1. Do you even need to accept any additional risk?

If you can succeed without assuming more risk, then don’t accept any additional risk.

If, on the other hand, accepting added risk increases your chance or likelihood of success or creates opportunities that could offer a decisive advantage or value to you, then you should consider taking on that risk.

Put in place contingencies or mitigations to minimize your risk or maximize your opportunities.

2. What additional information do you need to decide?

If you’re going to make a risky decision, then you want to have the best available information possible before making that decision. You would like to use that information to improve your chance of success while reducing your chance of catastrophic failure.

While you won’t ever have perfect knowledge of the situation, get comfortable with some degree of ambiguity, uncertainty, or unknowns.

Based on your appetite for risk-taking (or opportunity-seeking), determine the percentage of certainty or percentage of information that will be your cut-off point to decide. For Jeff Bezos, it is 70% certainty.

3. What are your options if you achieve less-than-ideal results?

While you can only hope for the best, the associated risk might leave you short of your goal.

Understanding what that means and what follow-on actions could be necessary as part of your risk-taking action. There are varying degrees of success and failure. Be prepared for either one.

While you can think about the situation thoroughly, most decisions are changeable and reversible. Just decide, move on, and course correct. Don’t overthink or overcomplicate your decision. Indecision is also a decision.

4. What are the potential costs of accepting the risk?

If you meet with wild success, this is less of an issue.

But if things don’t go as planned, you might find yourself answering for your decisions. Do the benefits outweigh the risk? Or does the risk pose such a threat that you’re just gambling on success?

And, even if you’re successful, there may be consequences to your decision.

You can plan under certainty, but you can only respond and be resilient under risk and uncertainty. Be prepared to constantly pivot or course correct as more information comes to light. Quickly experiment and learn from your ‘mistakes’.

Learn four things from Jeff Bezos’s approach to making decisions under risk and uncertainty:

1. Focus on decision velocity to drive innovation. (Speed matters to your future success.)
2. Make decisions with 70% of the information you wish you had. (Perfection kills; good enough succeeds.)
3. Most decisions are easily changeable and reversible. (Don’t be paralyzed with indecision.)
4. Disagree and commit to a decision and take immediate action. (Agree to disagree; move on with your decision.)

In summary

Do not fear making decisions under risk and uncertainty. It doesn’t mean you have to avoid risk and uncertainty either. Consider them as opportunities to succeed instead.

Respect risk and uncertainty as they present themselves. Understand how to embrace and exploit them to your advantage.

As you lead and manage people and organizations, risk and uncertainty and the fear of the unknowns will always present themselves. So, get used to them.

Decide fast, move on to action, and course correct to succeed.

Professional bio

Patrick Ow is a corporate and personal trainer and coach at Practicalrisktraining.com.

As a Chartered Accountant with over 25 years of international risk management experience, he helps individuals and organizations succeed by making better-informed decisions under uncertainty and taking the right opportunities and risks. He has developed PrOACT 31000, a practical yet simple framework based on the world-class PrOACT decision-making framework and the international risk management standard, ISO 31000.

Patrick has authored several eBooks including Strategic Risk Management Reimagined: How to Improve Performance and Strategy Execution and Things Parents Wish They Knew Earlier: The Family Risk Management Handbook.