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Sunday Thinking: Are you dealing with Risk or Uncertainty?

I was going through some notes of mine trying to clean up some older documents and I ran across this great quote from Frank Knight (an Economist who studied the effects of risk on market transactions) on the difference between risk and uncertainty:

“Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated…. The essential fact is that ‘risk’ means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating…. It will appear that a measurable uncertainty, or ‘risk’ proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all.” http://en.wikipedia.org/wiki/Knightian_uncertainty

To review:

Risk is measurable: i.e. there is a 20% risk that this is going to fail

Uncertainty is not: I have no idea where this cave goes

I enjoy that he makes me think of the two terms as the totally distinct items they are. He then goes on to nail the point home by stating that the fact we can even measure risk makes it so radically different from uncertainty that we should question why we think of them in the same light at all.

I wanted to share this with you to encourage you to engage with your team and yourself to ask which of the two are you dealing with? With this enhanced vocabulary maybe we can all make better decisions.

Do you have any terms that people often think of as the same, but are not? (i.e. Complex and Complicated is another favorite of mine that people often confuse).

Happy Sunday,

-d

About Dru Sellers

Sr. Software Engineer at Dovetail Software.
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  • Anonymous

    Yup, it wouldn’t surprise me if Knight had an influence on Taleb’s The Black Swan. :) 

  • http://www.facebook.com/profile.php?id=586857552 Travis Luther

    This is right out of Nassim Taleb’s “The Black Swan”. If you have variables you can identify as risk variables then you should be able to conceive of a strategy to take corrective action. If you’re able to do that then you’re not really dealing with risk at all, rather just some deficiency in your business plan or operations. It is the unidentifiable event  or variable (Taleb’s “Black Swan”) that really matters. This is because it is that one thing (risk) no one was able to identify – and consequently has the biggest impact on your business (both good or bad). Mitigating ‘risk’ is just ‘problem solving’. Addressing ‘uncertainty’ is an impossible task and a waste of resources – resources better spent patching up ‘risk’ in your business plan.

  • Mia

    What about reschedule and postpone: the first implies a certain date, while the latter doesn’t.

    So even when dealing with technicalities, a good language means a good and fruitful communication.

  • Mia

    k;l

  • Lee Brandt

    How about precision and accuracy? We talk about this all the time for estimates. 4days, 3 hours and 15 minutes is very precise; but about four days is more accurate.

  • Clarsa

    Happiness/pleasure.
    In the book “The Art of Happiness” an example is given of a woman who often uses her vacation time to go to a mountain resort. Offered a job in that resort community, she has difficulty understanding why she hesitates to leave her inner-city work with impoverished children. She is offered the concept that what brings her happiness is not the same as what brings her pleasure.

    Both are good. Optimally, one would like to have a lot of each. But if you think of your happiest memories, you will likely find that they involve some hardship, some unpleasantness.

  • Anonymous

    “Is this application complete?” vs “Is this application finished” – completion never happens, but finished is when you’ve done enough to get on with something else.

  • Anonymous

    ok. share the difference? don’t leave me hanging. :)

  • Anonymous

    ok. share the difference? don’t leave me hanging. :)

  • Anonymous

    Complete/Finished

  • Tevin

    How about i.e. and e.g?

  • http://realfiction.net Frank Quednau

    Simple and easy. e.g. I am pondering about some f# code that does a cartesian product in 3 lines of code. Its structure is simple and elegant, but I’ll be damned if it is easy, it’s doing my head in.

  • Anonymous

    I would think that your ‘risk’ is composed of many factors, one of them is the complexity of the story being worked. I think measuring the complexity is a good idea. That number + other factors ends up determining some risk number. 

    The next question is what is at ‘risk’, is it just the time its going to take? or are you going to lose something more tangible? If the goal is just to protect the time line then I would think the ‘risk’ number is probably not as substantial to the customer as the impact of the complexity of the change on the amount of time its going to take. 

    I am curious, how do you calculate the complexity of any given story?

  • Christian

    Thank you for a good post. To have a consistent vocabulary in a team has some very good advantages. Risk and uncertainty are definitely two good words to separate. In our team we have recently started measuring and documenting the complexity of different stories to give our customers a hint of how much risk they have associated with each task. In light of this article, would you say we should rather measure the risk directly instead of talking about complexity?