Unknown territory?Learn to love
surprises!And train to build
scenarios!What is uncertainty?
We live in it!
Uncertainty applies to situations, and they are often met in human and social life,
in which it is impossible to know beforehand :
Uncertainty applies to situations, and they are often met in human and social life,
in which it is impossible to know beforehand :
- Not only all the possible future events,
whther positive or negative, ordinary or decisive
How would we have foreseen before the discovery of America the
irresistible irruption of tomatos and potatos in European cuisine ?
How did poor cabbages survived such an onslaught ?
How would we have foreseen before the discovery of America the
irresistible irruption of tomatos and potatos in European cuisine ?
How did poor cabbages survived such an onslaught ?
- Even less what the
-
Not even their mathematical
probability (probable frequency),
except for events that happen routinely.
This is what makes uncertainty differ from pure "risk":
in case of uncertainty the odds are not measurable.
This fog about the future can be found
- In fully new,
disruptive, unprecedented situations
Such situations can happen at any moment in our ever changing society
(and in the Universe), a trait it shares with any dynamical system.
(and in the Universe), a trait it shares with any dynamical system.
- In rare /
exceptional situations ("black swans"),
This means events with only few precedents, of which the memory is
blurred.
Therefore their past frequencies are unavailable or irrelevant to be used as
probabilities; we find only unadapted, or too scarce data and information.
blurred.
Therefore their past frequencies are unavailable or irrelevant to be used as
probabilities; we find only unadapted, or too scarce data and information.
Altogether, uncertainty is something we don't know but are
...certain to meet!
Attitudes towards uncertainty
Hate it or love it!
People are usually more uncertainty averse than risk averse, as shown for example
by behavioral economics studies.
To take the example of
economic players, this can bring quite different attitudes
among them:
People are usually more uncertainty averse than risk averse, as shown for example
by behavioral economics studies.
To take the example of
economic players, this can bring quite different attitudes among them:
- Either they become very cautious when taking decisions.
They would be highly wary to invest in unstable assets (stocks).
That is why not only identified risks but also - in a higher degree -
uncertainty feeds bear markets and entails high "risk premium",
To compensate the "uncertainty aversion" normally lead to an
"uncertainty premium":
In other words, to accept to bet on a obscure future entails to ask very high
potential rewards , higher ones than in the case of "risk aversion".
In practice, in economic / financial markets this extra return is obtained
through a lower buying
price.
In economics, sociology, and management politics, uncertainty leads often
to shun initiative when facing new openings (precautionary principle,
covering ones' "a.s")
Which does not prevent some people to take initiative either because they
do not accept passivity, or because they build false certainties (see below).
That is why not only identified risks but also - in a higher degree -
uncertainty feeds bear markets and entails high "risk premium",
To compensate the "uncertainty aversion" normally lead to an
"uncertainty premium":
In other words, to accept to bet on a obscure future entails to ask very high
potential rewards , higher ones than in the case of "risk aversion".
In practice, in economic / financial markets this extra return is obtained
through a lower buying
price.In economics, sociology, and management politics, uncertainty leads often
to shun initiative when facing new openings (precautionary principle,
covering ones' "a.s")
Which does not prevent some people to take initiative either because they
do not accept passivity, or because they build false certainties (see below).
- Or they invent false certainties,
or at least are victims of apparent certainty (pseudo certainty).
Those
illusions allow them to alleviate the pain they feel when living in
uncertainty
Those
illusions allow them to alleviate the pain they feel when living in uncertainty
But is uncertainty always apparent?
Trusting or not 
History?
In some cases people might not realize, and might even deny, that they face uncertainty.
But also uncertainty might be hidden as things might seem to follow the norm,
for example when they match a classical law of probability.
This rather common smoke screen might be the result of:
History? In some cases people might not realize, and might even deny, that they face uncertainty.
But also uncertainty might be hidden as things might seem to follow the norm,
for example when they match a classical law of probability.
This rather common smoke screen might be the result of:
- Either some
mental block or magical thinking
that creates an illusion of certainty.
- Or the fact that in many cases, uncertainty is not apparent.
In such cases, everything seems to be running smooth ...or to be falling apart
without hope.
Nothing is seen on the surface that would feed doubt about the final outcome
in both cases. The evolution takes place underground and/or will be triggered
by an expected shock.
- Or, an excessive trust in - and a wrong use of - historical probabilist tools,
and this is related to hidden uncertainties, and/or not enough attention given
to evolutions, potential disruptions and rare events.
to evolutions, potential disruptions and rare events.
So what to do?
Have plans, but be ready to switch or adapt.
Prepare all kind of scenarios, even extreme ones, what else?
Also be ready to change your plans.
Thus beware of resistance to change / status quo bias / mental conservatism
(see underreaction)
Prepare all kind of scenarios, even extreme ones, what else?
Also be ready to change your plans.
Thus beware of resistance to change / status quo bias / mental conservatism
(see underreaction)
For more details
See the main article on the topic: Risk and uncertainty
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