We love the term VUCA - Volatility, Uncertainty, Complexity and Ambiguity which has been used for decades to describe the environment that decision-makers and leaders face. It encapsulated all the problems that a lease face in a simple framework of how much you know and how well you can predict outcomes. The graph below gives a nice visual of the problem.
However, the VUCA framework has been applied to finance and investment problems. I am not sure what this is the case. Perhaps it is a just different and not the say that investors are taught how to look at the market environment. Perhaps more importantly, the definitions associated with volatility, uncertainty, complexity, and ambiguity are not the way that people in finance and statistics think about the environment and risk. Still, the VUCA issues are discussed in finance; however, there is a not a framework that ties these issues together.
Volatility is easy for us to measure and discuss. The meaning of uncertainty gets to the heart of the definitional issues. What is uncertainty as separate from risk is not an easy issue to define. I am in the camp that risk is what is countable, and uncertainty is what is non-countable. This could be view as a distinction between objective and subjective risk. Uncertainty, through Frank Knight, has been described as those events which are uninsurable. Again, the current VUCA definitions do not translate well into finance.
Complexity is another concept that can be discussed but does not have a good definition within finance. The same can be said for ambiguity. What is an ambiguous environment will lead to several different definitions.
We think the VUCA framework if it can be adjusted to the finance and investment work will have significant usefulness for improving the discussions concerning risk.
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