Decision Quality Blog

Uncertainty.

I suspect we’ll all see lots of words spilled on the doings of 2008 and the implications for 2009.  Words like “turbulent times,” “recession,” “depression,” “bailout,” and more rivet the mind and churn the stomach.  It’s all interesting, but I think the key concept and word to focus on is “uncertainty.”

It might be useful to pause for a second to reflect on what the word means.  “Uncertainty” is easiest defined as “what you don’t know.”  There are lots of reasons that might be the case.  For example, something might be knowable but not by you.  Or not in the time frame you have to make a decision.  Or not at a cost you’re willing to bear.  Or not at all.  “Risk,” is a word that describes how you feel about uncertainty.

For example, I don’t know the starting time of the blockbuster movie that’s opening this weekend. But it doesn’t bother me and if I miss the next show, I can go to another.

The worst thing about the current economic situation isn’t the value of your home, your bank balance, or the number you see on your brokerage statement. It’s not projected sales, your stock price, or the prospect of headcount reductions. It’s the voice in your head that says, “yesterday you knew what to expect, today you don’t.” And it is that uncertainty, the feeling of not knowing, that makes people crazy, fearful, and worse.

I have three suggestions about what you can do to help yourself and the people you work with to deal with uncertainty.

Step 1: Talk About Uncertainty

Most people I know don’t like to talk about what they don’t know: We prize confidence and certainty in our leaders.  That’s too bad, because the truth is, there are more things we don’t know than we do know.

In good times, we tend to believe that the balance of factors is in our favor and whatever we don’t know probably won’t do more than delay our victory.  It’s an example of what I think of as “bell curve thinking.”  We simply expect that all the possible outcomes lie close together, and significant deviations from plan are unwelcome, unexpected, and unacceptable.
If the last twelve months have taught us anything, it’s that the range of possible outcomes lie well outside a normal distribution, what statistics mavens call a “power force distribution,” or what noted author and investor Nasim Nicholas Taleb calls “black swans.”

So the first and most important thing you can do as a leader, really any time but particularly now, is to talk with the people you work with about uncertainty.  It will take more than one question and it will take more than five minutes.  Probe for it, talk about it, ask “why,” and then do it again and again until you finally have it all out where you can see it.

Step 2: Put a Number To The Uncertainty

Naming a thing takes a lot of the mystery out of it.  Putting a number to it goes further still.

One of the dynamics that figures into how we respond to uncertainty, the good or bad kind, is our almost universal inability to accurately estimate, well, nearly anything.  For example, try this simple test.  In the margin someplace, right down the answer to each of the following questions.

1. Number of labor strikes in U.S. during WW II (Pearl Harbor – VJ Day)
2. The closing Dow Jones Industrials average for May 26, 1969
3. Height of Hoover Dam (feet)

Now let’s try it another way.

1. Write down what you would consider to be a surprisingly high number for each of the three questions, meaning you’re 90% confident that the number isn’t higher than that.
2. Now write down a surprisingly low number, again meaning you’re 90% confident that the number isn’t lower than that.

So now you should have three numbers for each, low, base, and high.

The answers are at the end of this article.  Unless you cheated, actually know the number, or have experience with the concept of “confidence intervals,” there is a better than 90% chance that all of your numbers are wrong: that the answer does not lie anywhere between your low or high number. The tendency towards overconfidence in our estimations is nearly universal.

In good times, doing a poor job of estimating outcomes doesn’t hurt that much.  In bad times, when we’re afraid, our ability to estimate the future simply goes out the window and the cost of being wrong can be devastating.

So put a number, or better a range of numbers, to the thing that worries you the most.  We sometimes call this the “clairvoyant question.”  It goes like this.

Imagine that a clairvoyant will appear in five minutes.  He/she has perfect knowledge of the future, but will only answer one question and the answer must be a number.  So he can’t tell you if you will be employed on a certain date next year, but he can tell you how much money you’ll make by or on any given day.

Think about this for a second.  There are two cognitive tricks you’re playing here, both of which are good.  The first is the act of forcing yourself to focus on the thing that really worries you.  In times of uncertainty, we tend to think that everything is worrisome and everything matters.  The second point is simply not true.  Not everything matters equally, and in this case, not everything will hurt the most.  So make a list and keep asking yourself, “Why does this worry me?”

Once you have the answer to the first question, put a range of numbers to it.  Make it as broad as you need to in order to feel 90% confident that the likely outcome is in there somewhere.  Now you’ve finally got something concrete to deal with.  It’s no longer an abstraction.

Note, that while I have been personalizing my example, you can and should do the same thing with the people you work with or call on.

Step 3: Create a Plan that Addresses the Critical Uncertainty

Naming the uncertainty demon brings it into the light.  Putting a number on it makes it concrete. The third thing is to honestly and directly create a plan for mitigating, insuring, or avoiding that critical uncertainty.

This is not to say that because you have a plan you’ll be completely successful.  It also doesn’t mean that some other unseen factor might not bang into you. It DOES mean that you have done the one thing that prudence and your psyche demand, which is to deal with the thing right in front of you which is the critical uncertainty.

I had the opportunity to listen to former Secretary of State (among many other distinctions) Colin Powell not long ago on the subject of leadership. He said . . .

In this context, problem solving is the part where we create a plan.  The kind of questions we should be asking are:
What can we do now to make sure the worst case doesn’t happen?

What can we do now to soften the blow if it does happen?

Further on in his speech, Powell had this to say . . .

This may sound counter to what I’ve said up until now, but it really isn’t.  You can and should learn to talk with the people you work with about the big uncertainties without showing or being afraid.

It’s Time To Lead

Leadership means many things, each of those things in their season.  Sometimes the need is to create a shared sense of purpose.  Sometimes it’s facing uncertainty head on.  Both are needed right now.  Trying to do those things without calmly and directly acknowledging and dealing with all those crazy emotions puts you in a position to rationally and logically work on plans to succeed. Failing to do that may seem convenient but under serves you and the people you work with.

Answers

Number of labor strikes in U.S. during WW II (Pearl Harbor – VJ Day)    14,371
The closing Dow Jones Industrials average for May 26, 1969    946.9
Height of Hoover Dam (feet)    726

Tags: leadership, uncertainty, decision making, decision quality, back swan, fooled by randomness, Nasim Nicholas Taleb, Colin Powell