Decision Making in the Age of Uncertainty

March 31, 2020

 

Covid19 has thrown many of our business plans into chaos. Whereas many of us in 2019 were planning for a positive upswing in business, with promise that the new decade will give us new possibilities, 2020 could not have started out any worse! What with the US attack on the Iranian general that almost plunged the Middle East into war, natural disasters – the volcano eruption in the Philippines and the floods in KL – and now, the world “war” against Covid19, the start of 2020 has almost been a perfect storm of worst case scenarios! 

 

Now that Covid19 has curled its pneumonic grip on the world, we must all learn to adapt to its business-decimating effects. Airlines are virtually grounded as we speak; restaurants have been closed; meetings and seminars have been cancelled; tourists have all but disappeared leaving the tourism industry reeling; even offices are devoid of people as staff work from home in split shifts. Covid19 may set up a new normal, as we grapple to come to terms with it. Some predict a quick end – by June this year – others don’t think it is that easy. 

 

So, what can we learn in such an age of uncertainty? How do we even make decisions if we don’t know what to expect? Here are some key insights…

 

 

1. Your Worst-Case is not bad enough!
The confluence of all that “bad luck” just goes to show that the worst-case scenarios that we built for ourselves at the end of 2019 are not nearly as bad as reality! Now, does this mean that we have to be catastrophic in our thinking? Must we run around like Chicken Little shouting, “The sky is falling! The sky is falling!”? Well, not exactly. While we do need to think more catastrophically, the worst-case is not meant for us to cower in a corner, paralysed by fear; it is meant for us to mitigate its downside. True, we can never fully mitigate it because that would take truly deep pockets – pockets that even Singapore Airlines themselves don’t have – but we must now plan to take the sting away from such cases again. What we will see moving forward are businesses creating a bigger war-chest; businesses becoming more sustainable as they diversify both their supply chain and their business model. Indeed, we will see some businesses embarking on more expansions to ride future storms. Or they go bust!

 

 

2. You cannot work “one-plan-at-a-time”

In an earlier article, I wrote about the “one-plan-at-a-time” propensity of decision makers. What this means is that people will plan one course of action (presumably the best option) and they will not change that until there is overwhelming evidence that the plan is not working. But when that happens, guess what? They don’t know what else to do! Many smart people are like this; just look at WHO Secretary-General Tedros Adhanom Ghebreyesus. At the beginning of Covid19, he was on the track saying that it was not a pandemic; in fact, it took them a whole month and a half to just name the virus! And because he was on a “one-plan-at-a-time” mode, so long as the virus was not a pandemic, we are “okay”; extraordinary measures are not needed. If WHO had called the virus a pandemic earlier, we might not see such high incidences in Italy. But Sec-Gen Tedros is no idiot; he has a PhD in community health, and he was previously Minister for Health in Ethiopia. He was particularly successful in fighting AIDS and meningitis in his country. Yet, even for one as smart as he, he also succumbed to the “one-plan-at-a-time” bias. In this age of uncertainty, we must be flexible, understanding that several plans need to be crafted, with even two or three plans being effected at the same time! 

 

 

3. Take “more risks”
This flies directly in the face of logic. In the age of uncertainty, we should shore up our risks and we should NOT take any risks at all, right? Wrong! It is precisely when we are faced with many possible futures is the time we need to take more risks. We cannot hold back and wait for the one right option (there, the “one-plan-at-a-time” bias again!) that will give us the big payout. In an uncertain age, we need to take a portfolio perspective. We need to think like venture capitalists; make 10 small bets, knowing the 5 will lose your money, 2-3 will breakeven, 1-2 will make some money, and another 0-1 will hit the ball out of the park. If you think like this, you will make many small bets, rather than one big one. In a sense, while it seems like you are taking “more risks” with more bets, you are in fact taking “less risks” with that. Because if less than 10 percent of your bets will be a huge success, you cannot have anything less than 10 projects going. I know, some people say that this is wasteful; why not just avoid the 5 that will lose money, and focus your talent and money on the ones that would either breakeven or make a lot of money. But, that 10% is the baseline, and you cannot beat the baseline. And what is 10% of 5 projects? Half a project. And half a project is no project at all! Hence, in order for us to get at the big successes, we must accept that we will have the small losses. The more small losses we have, the greater your chance of making the next one a huge success! So, as we emerge from Covid19, we will see more companies spread their investments; go for several different business opportunities, not because they want to make more money, but because they don’t know WHICH will make them more money, and they need to find that out.

 

 

4. Expect the unexpected
So here’s the conundrum – if you expected the unexpected, wouldn’t the unexpected be expected? And if the unexpected is expected, then what would be the unexpected? Okay, I am just playing with your mind; basically, this does not mean that they are not unexpected incidents, but what it means is that whatever you plan for and expect to happen, will not happen as you plan. This is because you don’t know what you don’t know; and the amount that you don’t know is certainly far more than what you do know! Hence, the reality that you think you see is, in fact, NOT the reality at all. Just because you have been successful in the past does not mean that you will be successful in the future. The more you look into the abyss of what you don’t know, acknowledging that what you don’t know can have the power to knock what you do know, then you can at least prepare for the unexpected to happen. No one expected Covid19 to happen; yet, epidemiologists have been predicting Disease X for a long time. So, it is not as though it was unexpected, we just did not expect it to happen NOW. But be it yesterday, today or tomorrow, this was bound to happen. It is not an outlier. And if you are not ready for it, then you deserve to be hit badly by it.

 

 

So, what can we do to make decisions in an age of uncertainty?

 

Firstly, don’t trade in absolutes. Sales forecasts, business trends, investment results are all false because they give a very uncertain certain number. For example, it is a fact that the probability that it will rain tomorrow is 50% (because either it will rain or not). But that is a very simplistic way of looking at the chance of rain. Today, we have many sensors like barometric, precipitation, temperature gradients to help us predict the chance of rain to a better degree. Those elements allow us to peer into the known unknowns so that we can increase our chance of predicting the outcome. Yet, we cannot be certain, can we? If you can, then the Singapore metrological company wants you, since they need help making better predictions of rain in our tiny island! So, if the professionals cannot get it absolutely right even in their jobs, we, who are less knowledgeable, will be even LESS certain. Hence, instead of trading on absolutes, start planning based on a range of outcomes. 

 

Next, identify the catastrophic scenario. This is the situation where it would stretch your business to the max, probably causing it to collapse, just like Covid19 is doing now to the airline industry. While we do not expect the catastrophic scenario to play out every so often, you also cannot rule it out completely. From 9/11 to SARS to the global financial crisis to Covid19. 2001, 2003, 2008, 2020. Every ten years or so, there will be something big that will shock the global economy, triggering your catastrophic scenario. Failure to plan for this scenario is planning to fail by it. It does not mean that you need to fully mitigate the risk since such events are remote; yet, with every year that such a catastrophic event does not occur, the risk that it would happen this year increases. Hence, proper planning needs to be put in place. Do you have proper business continuity plan? Do you have proper reserves? Are you able to reduce your variable costs? Are your fixed costs at the bare minimum? You certainly cannot do this during the time of the catastrophic scenario; hence, you need to plan that into your own business model well in advance.

 

Thirdly, launch a portfolio of business solutions. The more diversified your business is, the more likely you are to survive in the age of uncertainty. If you are running a travel agency business, for example, and this is now under a lot of stress during Covid19, if all your eggs are in just this one business basket, then your risk is very high. You might like to diversify by becoming an online content developer (travel vlogs, for example) or setup a food business that accentuates the different flavours of the world. What you want to do is to make sure that the businesses are diverse, yet have a connected theme with your main business so that they add value, one to the other. If your decision is not business-continuity related, you can still launch a portfolio of solutions. If you are deciding on increasing your personal wealth, the same thinking applies. If you are deciding on hiring staff, the same thinking applies. If you are deciding on saving costs, the same thinking applies. By putting in place a portfolio of solutions into your decisions, you spread the risk of being wrong. Sure, you might increase the cost of your decision somewhat – either by time or by money – but this negates the “one-plan-at-a-time” all-or-nothing type decisions that work so well in the age of certainty, but come apart in the age of uncertainty. Anyway, the cost of failure far outweighs the cost of the decision.

 

Finally, learn to walk the fine line between nurturing and axing an idea. Since we do not know what we do not know, we must allow an idea to take shape and unfold as the situation moves on. Terminating an idea too soon might not allow us to uncover what we don’t know; yet maintaining an idea that has gone past its usefulness in terms of the lessons we can learn and the benefits we can get from the idea wastes precious resources. This is a key skill in decision making, especially in the age of uncertainty – to hold on to an idea for as long as we need, but no longer.

 

Business as usual is no longer usual

You will realise that our environment has become more uncertain over time and where we once could revel in making the singular right decision is no longer valid. Because the minute we make one decision, the conditions for that decision would have already shifted, making that decision invalid; and we need to make another one. You will realise that we will be in a constant state of flux. Just like in quantum physics where a particle can take two or more positions, our situations can be just as complex. Hence, we need to take two or more – sometimes contradictory – decisions just to address one situation. That is the quantum flux of decisions today, the current state of uncertainty. Hence, business as usual is no longer usual; it is indeed more and more unusual. And that takes a different type of decision-maker; one who is willing to experiment, one who is willing to learn, one who is willing to fail, one who is willing to try again. Because that is the new normal. And that is what you must learn to make the right decision in the age of uncertainty.

 

It’s going to be a bumpy ride! Enjoy the trip!

 

 

 

 

 

 

 

 

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