How to factor uncertainty into decision-making?
Or how to manage an uncertain future?
June 4, 2020, Kati Järvi
Uncertainty. A word that needs no introduction this spring. We have all come to terms with it. Some may have even fallen in love with uncertainty! This blog explores what uncertainty is exactly, and how to deal with uncertainty.
Uncertainty about the future: what does it mean exactly?
To define uncertainty is to bring clarity to what exactly is uncertain and how to tackle it. First, we need to differentiate between state, effect, and response uncertainty.
- State uncertainties refer to the uncertainties of the organization’s external environment. They include uncertainties of the broad macro-environment and often arise based on societal, political, economic, technological, etc. changes. State uncertainties also include uncertainties related to consumers and demand, competitors, suppliers and so forth. Fear of COVID-19 and behavioral shifts arising from the fear are topical examples of state uncertainties.
- Effect uncertainties are uncertainties of the impacts of the environmental events or changes on an organization. Effect uncertainties relate to whether or not changes in the external environment will impact an organization as well as to nature, severity, and timing of the impacts. They are about unclear cause-and-effect relationships: however, the change in the external environment is not necessarily unclear. For example, the aging population is a well-established trend, but a company might be uncertain about the effects of this trend on their business.
- Response uncertainties deal with uncertainties related to the availability of response options and their timing, value, and utility. Responses can be understood as any type of decisions: strategies, investment decisions, decisions to enter a new customer segment and so on. Often, we forget that one available response option is not to do anything (beware of the action bias creeping in!). Response uncertainty is experienced when choosing what to do / not to do, when, how, and with what expectations.
Distinguishing between state, effect, and response uncertainty helps in answering the question of what is really uncertain. To tackle the uncertainties, we need to understand the different levels of uncertainty.
- Level 1 – A clear enough future: at this level, it is possible to develop a single forecast, prediction even, of the future. This forecast can be determined precise enough e.g. for decision-making or strategy development. At this level, state uncertainty is usually low, and effect and response uncertainty are manageable.
- Level 2 – Alternate futures: at this level, the future can be described as one of a few alternates, discrete outcomes. At this level, it is not possible to predict which outcome will occur, but probabilities can be assigned to the alternate outcomes. At this level, state uncertainty increases compared to level one leaving effect and response uncertainty still manageable.
- Level 3 – A range of futures: at this level, the future can be described as a range of alternative outcomes. The range bounds a continuum where the actual eventually lies. No natural discrete scenarios emerge. As the state uncertainty often further increases at this level, so do effect and response uncertainty.
- Level 4 – True ambiguity: at this level, it is nearly impossible to foresee the range of potential outcomes as the identification of variables impacting future might be impossible. Typically, all state, effect, and response uncertainties are high at this level.
How to deal with uncertainty?
Factoring in uncertainty to business or any decision-making depends upon what is the type of uncertainty the organization or decision-maker is confronting.
When there is uncertainty concerning the external environment, start with identifying the most relevant uncertainties from the external environment and then continue with imaging alternative outcomes for them. Established frameworks, such as the 11 sources of macro change help in structuring thinking around the sources of uncertainties.
Regarding the world after COVID-19 and the uncertainties that lie ahead, our team of futurists have put together a holistic view of important drivers of change. Such a view is an excellent starting point to consider the most relevant uncertainties for your organization.
How to then imagine alternative outcomes for the state uncertainties depends on the level of uncertainty. If the level of uncertainty is low, a few alternate outcomes could suffice. If the level of uncertainty is high, one needs to scan the horizon broadly and to imagine several alternate outcomes where combining different thinking logics (the technocentric, the nostalgic, etc.) can be very helpful.
Naturally, the state uncertainties and their alternate outcomes are interdependent. A tool for dealing with uncertainty is scenario planning, scenarios being alternative, plausible, and internally consistent maps of how the future may unfold. Depending on the number of uncertainties and their alternate outcomes, a number of scenarios emerge based on what uncertainties and alternate outcomes are selected and prioritized for the scenarios. On the one hand, a 2x2 scenario matrix can be developed based on two uncertainties having two alternate outcomes each whereas, on the other hand, 10 uncertainties with 4 alternative outcomes for each would produce over a million potential scenarios.
When there is uncertainty concerning the impacts or responses, start with identifying the areas of your organization that might be affected or where an action or response might be needed. In addition, identify also the areas of your customers, suppliers, competitors, etc. business and where an action or response might happen. Areas where effects could be uncertain include strategy, business model, investments, new business opportunities, operations, and function, to mention a few. Once those areas have been identified, it is essential to dive deeper into how they might be impacted, what is the nature and severity of the effect as well as when an impact might happen. Same questions apply for coping with response uncertainty.
To consider how to respond and how to plan for uncertainty, play is a way to accelerate imagination and learning, in a risk-free manner. Inverting your company, destroying your business, preemptive postmortem, etc. are all ways to imagine alternative responses an organization could take. Finally, it is essential to understand how different responses and actions relate to state uncertainty and the alternative future. To put in other words, what are the implications of your moves.
- Required moves: those choices/actions that must be taken to ensure the viability of the organization in the near term
- No-regrets moves: the choices/actions that make sense under any scenario
- Big bets: substantive choices/investments made now, with the clear hope or expectation that one or more of the scenarios emerge (or can be made to emerge)
- Contingent moves: moves that are contingent on one or more of the scenarios emerging
- Satellite moves: smaller moves or investments placed selectively across one or a number of the scenarios, in conjunction with bigger bets.
Ready to explore uncertainties and their impact?
Join our Foresight Challenge here where we are crowdsourcing insights on the most important uncertainties concerning the world after COVID-19. Our aim is to harness the wisdom of the community to assess how COVID-19 will impact important phenomena and how the phenomena in turn will impact the world after COVID-19 - to create insights that would benefit and guide us all to the future.
8 June 2020
Does the coronavirus combat climate change or accelerate it?
Cleantech struck by COVID-19 and cheapening oil prices will have a major impact on the future of energy
1 June 2020
Future of education after COVID-19: AI becomes the teacher while humans mentor and coach
Will AI take an important role in the future of education?