How Risk and Uncertainty Influence Decisions

While you may not know his name, whenever you make a major decision you encounter the tension (and emotional struggle) he recognized and defined. For twenty years, Frank Knight and his colleague Jacob Viner directed the Department of Economics at the University of Chicago. Knight's dissertation titled Risk, Uncertainty, and Profit (1921) drew a distinction between risk (when the probability of an outcome is possible to calculate and insure against) and uncertainty (when the probability of something cannot be determined).

The underlying problem with any major decision is you cannot know the outcome or be certain, after the decision is made, whether or not another choice would have been a better option. The use of a criteria-driven decision making process helps you ensure against the risks in a decision by making the process as quantified as possible. Tension builds when you expect even the best decision process to eliminate all of the uncertainty that is inherent in a decision.

When a child starts driving, the family's auto insurance carrier protects itself and the family against the known and calculated risks of a teenage driver by raising the insurance premium by one hundred percent or more. The insurer has enough documented experience to accurately calculate the risk probabilities and protect everyone against them. But there are no premiums high enough to eliminate the uncertainty a parent feels when that new driver pulls out of the garage and on to the street.

I've met several people with the title Risk Manager. I've never met anyone that told me they were hired to be the Uncertainty Manager. (A few years ago, Fast Company provided some valuable insight into this tension in an article titled No Risk, No Reward.)

It is difficult to protect against every risk and impossible to eliminate all uncertainty in a major decision. When the criteria in a decision are clearly identified and accurately quantified they can be compared against the alternatives, making any decision a logical process that balances emotion with reason.

Attempting to eliminate all uncertainty in a decision often results in no decision at all (which is the decision). You can't eliminate decision uncertainty so balance it by accurately and effectively managing a decision's risks.

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