Dealing with uncertainty.

I often describe risk as the affect of uncertainty on our lives and objectives, but what is uncertainty and how do we make informed decisions on risk with incomplete or ambiguous information? To answer this question I like to refer to a statement made by Donald Rumsfeld, who was the Defense Secretary under President George "W" Bush.  

In a press conference responding to the lack of evidence linking the government of Iraq with the supply of weapons of mass destruction, Rumsfeld stated, “we know, there are known knowns; the things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the things we don't know we don't know”.

The final two categories in Rumsfeld’s statement are a useful frame of reference when thinking about uncertainty. Known unknows are uncertainties that are recognized and acknowledged but are difficult to quantify. While the possibility of certain events or outcomes is understood, their exact probability or impact is not known. Known unknowns can arise from a variety of factors including, incomplete information, a lack of expertise, or insufficient historical data. 

Unknowns unknowns differ from known unknowns in that they are not anticipated or even considered in our decision making process. They are in effect, blind spots in our thinking and represent events or outcomes that are entirely unexpected or outside the realm of our knowledge and prior experience. A related concept you may be familiar with is “black swan” events, a term popularized by Nassim Taleb, which refers to rare and extreme events that have a significant impact and are often unpredictable or unforeseen. 

Black swan events are characterised by their high impact, low predictability, and retrospective explanations, where people tend to construct narratives after the fact to explain why an event happened, drawing on information and knowledge gained from the event itself. While black swan events are a subset of unknown unknowns, not all unknown unknowns are necessarily "black swan" events. The latter are characterized by their extreme impact, whereas unknown unknowns can run the gamut from the minor to the catastrophic.

Navigating unanticipated events

So, what can we do to effectively navigate uncertainty and make informed decisions on risk despite the challenges highlighted above? First, we need to accept that uncertainty, like risk is inherent in everything we do and can never be entirely eliminated. However, we can work to reduce uncertainty by gathering more information, conducting research and analysis, improving our knowledge or expertise, and developing robust risk management strategies.

Remember, our objective from a risk management perspective is to assess and manage uncertainty effectively. We achieve this by establishing a detailed understanding of our operating environment, identifying and analyzing potential risks, estimating their probability and impact, and implementing robust controls to reduce these risks to as low as reasonably practicable. 

This includes finding an optimal balance between preventative, detective and corrective controls and monitoring these to ensure their effectiveness. For a detailed explanation of controls check out the previous blog post “adopting a control-centric approach to risk management”. 

So, how do we develop preventative controls for something we can’t anticipate? Keep in mind preventative controls don’t need to be specific or highly prescriptive in nature. The introduction of regular risk assessments, robust systems and processes, redundancy, training and continuous monitoring and evaluation are just a few examples of generic controls that can minimize the potential occurrence of unforeseen events. 

Then by layering in generic corrective controls including contingency planning, crisis management, business continuity strategies and training and scenario based problem solving we become more resilient, adaptable and better equipped to respond proactively to unknown unknowns if or when they arise.

Stay safe.