Times of uncertainty

Uncertainty And ConfusionThe world does not disappear when you close your eyes. The illusion that everything will remain the same is at best temporary. When you open your eyes, the world presents itself with a new appearance and from different lights.

Uncertainty can be the suspense that we experience in terror movies. Perhaps it is the cracking sound of a wooden door in an old mansion when you are alone, or perhaps it is the fear that a dead body might rise up in the middle of a storm while you are lost in an unknown land. We do not need to seek out for such movies if we enjoy uncertainty, for it has come to be an ineffaceable part of our lives.

It is useless to ignore uncertainty and as a result also fruitless to evade it. In Chinese culture, Yin-Yang (be aware that my name is Ying Ying and not the same as Yin) states the duality of things. There is no absolute good nor bad. While change can be interpreted as threat, it also conceals opportunities. The Chinese word crisis is an example of this philosophy: Besides the character danger, is the character for opportunity.

In a prior post about the dream model, I included uncertainty as an epsilon in the mathematical equation. In this article, I want to explore the uncertainty and the perception thereof from the perspective of people, organizations and regions.

Uncertainty concepts from finance

Financial markets are one of the most obvious places to look at when talking about uncertainty. Millions of dollars can be gained and lost in a matters of minutes.

Within six minutes, the Dow recovered its losses and was trading with triple-digit gains. Reuters estimated that the temporary loss of market cap in the S&P 500 alone totaled $136.5 billion. – CNBC

Besides equity, fixed-income, commodities, forex and other financial instruments also experience a great amount of variability. The financial field can thus provide us with some insights about how to deal with uncertain times. Three of the most important concepts are risk aversion, risk tolerance and risk management.

Risk aversion

In financial theory, most investors are considered to be risk averse; i.e. when faced with two investments with a similar expected return (but different risks), they will prefer the one with the lower risk.

Risk tolerance

Risk tolerance depends upon the ability and the willingness to tolerate risk. In finance, the ability to tolerate risk is related to factors such as the amount of wealth and stage of life. The willingness to tolerate risk is very personal and very dependent upon personal circumstances, personality and preferences.

Risk management

If we understand risk as the downside risk, i.e. the uncertainty of a return and the potential for financial loss, managing risk means understanding how much potential loss one can live with. In portfolio management, it would mean understanding what is the maximum drawdown and in trading, it would mean knowing the stop loss price.

These three financial risk concepts can be applied to uncertainty:

Uncertainty aversion

We can imagine that most people are averse to uncertainty and change.

Uncertainty tolerance

There are different types of tolerances:

  • Low degree of tolerance for uncertainty: people who get sick at the slightest uncertain sign/ low tolerance for uncertainty are probably better off when put into a “safe” role. These type of people might be more suitable for working in a big company in which change takes a while to get noticed.
  • Medium degree of tolerance for uncertainty: people who do not really care whether there is certainty or not.
  • High degree of tolerance for uncertainty: people who like and actively seek uncertainty.

The different degree of uncertainty tolerance can be explained by the diversity of experiences and personalities. For example, in an event organized by Professional Women Network (PWN), Monique Pooter talked about a change she experienced after having stayed over 20 years in the same job. This concept of change and whatever uncertainty it implied is certainly different from the uncertainty a trader could experience on a daily basis in the financial markets or job changes he/she experiences in modern life.

The tolerance degree is also fundamentally psychological. A HBR article has classified people into those who play to win and those who play not to lose. If you belong to the latter group, you might experience a higher degree of uncertainty and fear at any given time because of the psychological phenomenon known as loss aversion.

Uncertainty management

To manage your own uncertain circumstances, you should know how much uncertainty you can tolerate and when to move to a safer position.

Personal uncertainty

The way we deal with uncertainty has a great influence in many of our choices. People who have a higher degree of tolerance can engage in actives such as trading and sales, or as I did, enter a start-up instead of a well-established firm:

  • A role in a start-up is much more significant than a role in a big company. Even under such circumstances, one person cannot control the result. This is where uncertainty creeps in. There are forces in all directions and you cannot predict the end result of a process nor action.
  • Performing a management role also allowed me to move from small micro level thinking to big macro level thinking. At this level, uncertainty feels at its peak because markets and needs change extremely quickly; most often much quicker than internal decisions, for which changes in decisions often follow on.

While my flexibility and high tolerance for uncertainty was not my primary consideration for my decision to enter the start-up world, the perception of uncertainty can certainly influence our decisions without our awareness of it.

For example, if you had a project offer now, which might not necessarily be the best project you could take on, you will most probably end up accepting it to avoid uncertainty. The well known phrase “a bird in the hand is worth two in the bush” reminds you to take the given opportunity without dealing with the uncertainty of a better offer, but who could have been sure that something better was not coming up?

Attitude

In times of uncertainty, attitude counts. As I mentioned in the post 3 love inspired business principles:  If a = 1, b = 2, c = 3…. z = 26, then attitude (a + t + t + i + t + u + d + e = 1 + 20 + 20+ 9 + 20 + 21 + 4 + 5) equals 100.

Uncertainty can also mean adventure and this quote, which appeared on Fortune magazine recently, summaries it all:

“The difference between ordeal and adventure is attitude”.

When talking about attitudes, I also like to quote Steve Jobs:

Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked.

He reminds us to take risks, i.e. accept uncertainties. There is actually nothing worse that could happen. On a side note, there is a song entitled: Don’t Be Afraid, You’re Already Dead.

Organizational uncertainty

Organizations are made up of people and hence all that we have discussed above is relevant to this section.

The difference lies in the structure of an organization. There are leaders and people being led. It is well believed that leaders play a significant role in defining the culture of a team and one would also expect the uncertainty tolerance of the team to be influenced. This is, indeed, to a certain degree true.

The more confident the leaders play their role, the better the team feels when faced with uncertainty. However, there is also a Chinese saying that:

“It is easier to move a mountain than change a person’s nature.”

If someone is very uncertainty averse, it is hard to change his/her thoughts. In my personal opinion, it is better to allow them go to somewhere more “certain”.

In general, companies are witnessing change constantly. If your company does not change itself, it will soon be outcompeted by competitors who are working and moving forward while you are still afraid of making change plans.

Exploring possibilities

On an organizational level, one should explore possibilities for:

Uncertainty means possibilities.

As leaders, we should remind our teams of the nature of uncertainty and change. However, to best explore possibilities in uncertain times, we can also hire people who are willing to accept and even foster change.

Regional uncertainty

If personal experiences and the team members of an organization determine the degree of personal and organizational uncertainty tolerance respectively; culture plays an important role in the uncertainty tolerance.

In a trip to the US two weeks ago, I felt the differences in the uncertainty and risk tolerance degrees between the US and Germany. The following two examples come to mind and can well illustrate such differences.

  • Fail fast philosophy: In the US, it is ok to fail, just fail fast and start something new. Start-ups move fast and adapt to the changing environment. In Germany, people generally prefer to do everything perfectly and reduce all kinds of uncertainty.
  • Venture capital: The lower risk/uncertainty tolerance is also reflected in the venture capital scenario. While there are 1250 venture capital firms active in the US, there are only around 20 active in Germany. Here is a study exploring the German venture capital from an US perspective.
Risk goes with return

While regional uncertainty is at a very macro level and we do not have immediate influence on it, it is worth remembering that that risk goes with return. A higher uncertainty also means a higher possibility of return. In the meanwhile, people with higher uncertainty tolerances might just find California very attractive.

Finally, whatever your tolerance for uncertainty is, remember to embrace it when you encounter it because it is something you and I cannot change:

“God grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.” – Reinhold Niebuhr

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  • Embracing uncertainty and coping with it; John Keats coined it Negative Capability in one of his letters: “…the quality that forms a Man of Achievement…that is when man is capable of being in uncertainties, Mysteries, doubts, without any irritable reaching after fact & reason” 🙂