Decision Making Under Deep Uncertainty

The above is a part of the title of a World Bank report.  The full title of that report is

Investment Decision Making Under Deep Uncertainty – Application to Climate Change

While that report focuses upon that one specific activity – Investing, and one area of deep uncertainty – Climate Change, there are some very interesting suggestions contained there that can be more broadly applied.

First, let’s look at the idea of Deep Uncertainty.  They define it as:

deep uncertainty is a situation in which analysts do not know or cannot agree on (1) models that relate key forces that shape the future, (2) probability distributions of key variables and parameters in these models, and/or (3) the value of alternative outcomes.

In 1973, Horst W.J. Rittel and Melvin M. Webber, two Berkeley professors, published an article in Policy Sciences introducing the notion of “wicked” social problems. The article, “Dilemmas in a General Theory of Planning,” named 10 properties that distinguished wicked problems from hard but ordinary problems.

1. There is no definitive formulation of a wicked problem. It’s not possible to write a well-defined statement of the problem, as can be done with an ordinary problem.

2. Wicked problems have no stopping rule. You can tell when you’ve reached a solution with an ordinary problem. With a wicked problem, the search for solutions never stops.

3. Solutions to wicked problems are not true or false, but good or bad. Ordinary problems have solutions that can be objectively evaluated as right or wrong. Choosing a solution to a wicked problem is largely a matter of judgment.

4. There is no immediate and no ultimate test of a solution to a wicked problem. It’s possible to determine right away if a solution to an ordinary problem is working. But solutions to wicked problems generate unexpected consequences over time, making it difficult to measure their effectiveness.

5. Every solution to a wicked problem is a “one-shot” operation; because there is no opportunity to learn by trial and error, every attempt counts significantly. Solutions to ordinary problems can be easily tried and abandoned. With wicked problems, every implemented solution has consequences that cannot be undone.

6. Wicked problems do not have an exhaustively describable set of potential solutions, nor is there a well-described set of permissible operations that may be incorporated into the plan. Ordinary problems come with a limited set of potential solutions, by contrast.

7. Every wicked problem is essentially unique. An ordinary problem belongs to a class of similar problems that are all solved in the same way. A wicked problem is substantially without precedent; experience does not help you address it.

8. Every wicked problem can be considered to be a symptom of another problem. While an ordinary problem is self-contained, a wicked problem is entwined with other problems. However, those problems don’t have one root cause.

9. The existence of a discrepancy representing a wicked problem can be explained in numerous ways. A wicked problem involves many stakeholders, who all will have different ideas about what the problem really is and what its causes are.

10. The planner has no right to be wrong. Problem solvers dealing with a wicked issue are held liable for the consequences of any actions they take, because those actions will have such a large impact and are hard to justify.

These Wicked Problems sound very similar to Deep Uncertainty.

The World Bank report suggests that “Accepting uncertainty mandates a focus on robustness”.

A robust decision process implies the selection of a project or plan which meets its intended goals – e.g., increase access to safe water, reduce floods, upgrade slums, or many others– across a variety of plausible futures. As such, we first look at the vulnerabilities of a plan (or set of possible plans) to a field of possible variables. We then identify a set of plausible futures, incorporating sets of the variables examined, and evaluate the performance of each plan under each future. Finally, we can identify which plans are robust to the futures deemed likely or otherwise important to consider.

That sounds a lot like a risk management approach.  Taking your plans and looking at how your plans work under a range of scenarios.

This is a different approach from what business managers are trained to take.  And it is a clear example of the fundamental conflict between risk management thinking and the predominant thinking of company management.

What business managers are taught to do is to predict the most likely future scenario and to make plans that will maximize the results under that scenario.

And that approach makes sense when faced with a reliably predictable world.  But in those situations when you are faced with Deep Uncertainty or Wicked Problems, the Robust Approach should be the preferred approach.

Risk managers need to understand that businesses mainly need to apply the Robust/risk management techniques to these Wicked Problems and Deep Uncertainty.  It is a major waste of time to seek to apply the Robust Approach when the situation is not that extreme.  Risk managers need to develop skills and processes to identify these situations.  Risk managers need to “sell” this approach to top management.  Risks need to be divided into two classes – “normal” and “Deep Uncertain/Wicked” and the Robust Approach used for planning what to do regarding the business activities subject to that risk.  The Deep Uncertainty may not exist now, but the risk manager needs to have the credibility with top management when they bring their reasoning for identifying a new situation of Deep Uncertainty.

Explore posts in the same categories: Decision Makng, Enterprise Risk Management, Uncertainty

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2 Comments on “Decision Making Under Deep Uncertainty”

  1. “The variables that can profoundly influence success and failure are too numerous to count. That makes it impossible to predict, with any confidence, which markets a company will be serving or how its industry will be structured—even a few years hence.
    The result is an economic environment that is rich in opportunity but also marked by a substantial increase in awareness of risk and aversion to it— a phenomenon reflected in the rise of risk premiums throughout the world even while the risk-free cost of capital remains low”

    Dr David Hancock (Head of Risk, Transport for London), published a book on the subject in 2011(?) but commented:

    “The general perception amongst most project and risk managers that we can somehow control the future is, in my opinion, one of the most ill-conceived in risk management”.

    “The biggest problem facing us is how to measure all these risks in terms of their potential likelihood, their possible consequences, their correlation and the public’s perception of them”

  2. Andrew Howe Says:

    “It is a major waste of time to seek to apply the Robust Approach when the situation is not that extreme.”

    Completely agree. A converse is that simple techniques such as “probability and impact” are very badly suited to strategic and emerging risks. Some tools simple “automate stupidity”!

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