Scenario Planning (Cont.) Risk And Uncertainty

Need to distinguish between risk and uncertainty. Risk is a "known unknown" while uncertainty is an "unknown unknown". This concept refers to

- "known known" refers to when a question has an exact answer

- "known unknown" refers to a question with an imprecise answer

- "unknown unknown" refers to when we don't know what question to ask, ie it is not being considered; it cannot be imagined; it is as though it does not exist

As binary categories of either "predictable" or "unpredictable" are very rare, we need to handle uncertainty by using probability, ie based on past experience, there is a certain probability of the event happening again

We need to be careful not to mistake "unfamiliar" for the "improbable" or "unlikely" or "unimaginable", eg

- Pearl Harbour attack by Japan in WW2

- Cuban missile crisis

- 9/11 terrorist attack on World Trade Centre

This is called "mind-blindness"

. We blindly believe that we can control our own fate, ie we can control nature rather than live in harmony with it)

. Use simplification, generalisation &/or approximations to understand complex events, eg making assumptions about key factors, rounding off figures, etc. This can be very misleading. This makes accurate predictions about weather, economic/business cycles, recessions, political outcomes, etc very difficult to achieve, eg

i) Weather forecasters' challenges are

- it is a dynamic system ie everything affects everything else & systems are in perpetual motion

- uncertain initial conditions

- poor data

i) Economic forecasters' challenges are

- hard to determine cause & effect from economic statistics alone

- economy is not static, so some past explanations may not hold for future situations.

- impact of political decisions

- lack of accurate data despite the huge amounts produced, eg the US Govt produces around 45,000 economic indicators annually plus private providers are supplying 4+ million.

(NB do not mistake correlation for causation)


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