Decision Analysis to Solve Uncertainty Through Action Planning

 

Uncertainty can be described as the limited knowledge about future, past, and current events. Uncertainty is the gap between available knowledge and the knowledge decision-makers need to make their best choice. Uncertainty involves subjectivity which distinguishes it from risk which is measurable. 

There has been a large amount of research on decision-making with high uncertainty, yet little of this work has trickled down to finance even though predictions about asset returns is highly uncertain. Much of this uncertainty work focuses on long-term projects or high uncertainty modeling like climate change. In finance, predictions must also be made about the environment for which the decider has little control. For example, thinking about longer-term growth also means thinking about the political environment that will exist over a forecast. Risk as something that is measurable is a subset of uncertainty. 

Focus on scenarios or alternative views of the world as opposed to a single approach. There is a multiplicity of plausible futures, and it is important to think about these choices before there is a probability assessment. The normal view of "predict-then-act" should be augmented with "monitor and adapt" thinking. When faced with deep uncertainty, action should be delayed but adaption should be constant. 

Problems and questioned should be framed, then futures should be explored, and only then choices should be structured for future action. This can be done through either looking forward or forming a future and then working backwards on how to get there. In a high uncertain world, there needs to be greater focus on contingencies and not just forming a single path of action. 

The path for action must create exit ramps or contingent action given that the world may change quickly. This process has been called formally robust decision making that includes assumption-based planning, scenarios, exploratory modeling, and contingency formations. It has also been called dynamic adaptive planning. These approaches can be formally modeled but always contain the idea of forming several alternative view as opposed to a single narrative. 

Dealing with uncertainty through anticipatory action requires thinking through several types of action: mitigating action which reduces certain vulnerabilities, hedging action which reduces uncertain vulnerabilities, seizing action which takes advantage of opportunities, exploiting action which prepares to take advantage of uncertain developments, and shaping action which prepares to reduce points of failure.  

Dealing with uncertainty needs to look beyond just dreaming of "what-if" scenarios. It requires thinking through a complete action plan.