Risk & Uncertainty: Better Judgment

It’s easy to confuse the two but as Frank Knight wrote almost a century ago, they are two different things.

Little did he know, that in addition to his logic, the brain reacts to each differently. With risk, or KNOWN probabilities, the brain can handle it in a more or less linear way. With uncertainty, which is what most decisions are about, the brain COMPELS a judgment call.

This makes a huge difference in planning for just about any business decision – market related or not. See you can’t stop your brain from making the judgment call and you can’t stop it from calling on context to fill in what it considers the missing pieces. This is likely to be where the so-believed immovable biases of behavioral economics come from. With the brain looking to context, it remembers the most recent, draws on the emotional context left over from the last striking event and generally defaults to a last-in, first out kind of short-cut.

There are two lessons for making better judgment calls.

1. Accept the reality and responsibility that you can’t avoid them.

2. Resolve to always be very overt about the contexts operating in your perception.

Both of these require going beyond the numbers to the levels of confidence in one quantitative analysis versus another. Both require dissecting the beliefs in play. The end result however will be worth it.

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