Don’t confuse risk and uncertainty

There can be a dangerous confusion between risk and uncertainty, according to Rafael Ramirez, Director of the Oxford Scenarios Programme and Professor of Practice at the University of Oxford’s Saïd Business School.

Risk, like car insurance, is based on probability, ie what’s gone before — based on yesterday’s data.

Uncertainly is different. It’s something that could happen but for which there is no database to compare it with, such as the effect of Brexit on the UK. There is no pattern of data.

Professor Ramirez and co-author of the research, Jerome Ravetz, have identified three futures: Tame future is for things that can be managed. Wild future, where they place Brexit, is where we have no idea what the outcome will be because it’s never happened before, and then there’s Feral Future.

Feral futures are expectations that things might be made worse by risk-based actions. They cite the nuclear accident at Three Mile Island in the United States 40 years ago, where operatives assumed that what was unfolding was described in their manual. They discovered too late that responses based on that assumption were making the situation worse.

A business needs to understand whether a problem is risk or uncertainty. For risk you can take insurance out. But uncertainty can’t be predicted.

To tackle uncertainty, different points of view are needed, says Professor Ramirez. “You need to convene conversations with people who disagree with each other and hold the disagreements to be constructive.

“Listen carefully to opposing views. Then you can make a plan, you make assumptions about the context in which that plan is going to live, and then you ask yourself, what if that doesn’t come to pass and then develop another context and another plan.”

There is no robust database of what percentage of companies are scenario planning, but a company undertaking such planning will have an advantage over its competition, he added.