Risk or Uncertainty – what are we dealing with in the context of COVID-19 and why does it matter?

The distinction between risk and uncertainty

One hundred years ago, Frank Knight – an eminent American economist – drew a distinction that is particularly pertinent for decision-making in the context of the COVID-19 pandemic. This is the distinction between risk and uncertainty.

In his 1921 work “Risk, Uncertainty and Profit”, Knight said:

"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."

In a nutshell, the distinction drawn by Knight implies that risk is measurable, whereas uncertainty is not. If risk can be identified, measured and quantified, there is a good chance that risk can be controlled and effectively mitigated. However, the same cannot necessarily be said of situations that are characterised by deep uncertainty.

Where there is deep uncertainty, a “predict then act” model is not appropriate because the past is not necessarily a good indicator of what will happen in the future. On the contrary, the future is unknown and, in fact, may be unknowable because of profound uncertainty about what the future might look like.

The emergence of the COVID-19 pandemic is a case in point. Despite the fact that, historically, the world has previously had to contend with other pandemics and notwithstanding the fact that the COVID-19 has been wreaking havoc around the globe for some months now, the ultimate health, economic and social outcomes of the pandemic for society at large are not yet known and will not be fully known until the crisis has passed.

The Collingridge dilemma: adequacy of information vs adequacy of response

The main challenges faced by decision-makers when confronted with deep uncertainty of the kind we are seeing with COVID-19 are captured by the so-called “Collingridge dilemma” – a dilemma that involves a lack of adequate information about the future coupled with the risk that adverse outcomes could eventuate and become entrenched in the future if proactive, pre-emptive action is not taken. The dilemma essentially implies that responses may be needed to avoid adverse outcomes in the future. However, uncertainty about the future makes it very difficult to develop responses that have the capacity to avoid or, at least mitigate, the adverse outcomes.

So where does this leave decision-makers when faced with deep uncertainty? Are they destined to make bad, inappropriate or inadequate decisions in the face of deep uncertainty? On the contrary, these outcomes are not inevitable provided that certain key steps are taken.

Decision-making under conditions of uncertainty

The first involves a recognition of the deep uncertainty that exists and an appreciation of what this deep uncertainty means in practical terms for making decisions. In particular, uncertainty about the future means that decisions that are deemed necessary today may not necessarily be appropriate for tomorrow, when the context has likely changed.

The second is establishing flexible and dynamic decision-making structures and practices to avoid rigid, static outcomes that fail to respond to an ever-changing external environment. In practice, this may involve frequent, free-flowing meetings and representation by stakeholders with diverse backgrounds and perspectives. These features will help to ensure the spectrum of issues, challenges, responses and possible outcomes are fully explored before decisions are made.

The third is to ensure access to the best possible information. The information required to make decisions will differ depending upon who the decision-maker is – an individual, a local community, an SME, a large corporate entity, State government, or Federal government. It will also depend upon the nature, scale and likely impact of the decision that needs to be taken. For decision-makers where high stakes are involved, exclusively confining decision-making to expert information will not necessarily be the right approach. Complementing expert information with lay input from relevant stakeholders may enable important perspectives, information and issues to be brought to bear on the decision-making process.

The fourth is to ensure effective communication of decisions that have been made. This will involve ensuring that the frequency of communication, the mode of communication, as well as the content of communication are responsive to the context and tailored to the particular audience and stakeholders affected by decisions.

Good decisions versus good decision-making

Making decisions in the face of uncertainty is clearly challenging, as has been highlighted by a broad range of decision-makers affected by COVID-19. No doubt, once the pandemic has subsided and the dust has settled, there will be plenty of reflection and second-guessing about decisions made whilst in the throes of the crisis. Inevitably, the relative merits of many decisions will be questioned. Nevertheless, adopting a decision-making model that is aimed at responding to uncertainty rather than risk will help to ensure that decisions are as good as they could be, given the very trying circumstances presented by COVID-19.

References

Knight, F. H. (1921) Risk, Uncertainty and Profit (Houghton Mifflin Company, Boston and New York). Available at: https://fraser.stlouisfed.org/files/docs/publications/books/risk/riskuncertaintyprofit.pdf

Collingridge, D. (1980) The Social Control of Technology (Palgrave Macmillan)