When making decisions, we often try to minimize uncertainty. Uncertainty comes from a lack of knowledge or an unpredictable environment.
Uncertainty can be reduced by gaining more information, choosing a more predictable option or hedging against the uncertainty. All these options incur a cost, however.
Instead, it can sometimes be valuable to embrace uncertainty. Uncertainty reduces competition for opportunities, which can increase our returns when we succeed.
So when should you embrace uncertainty?
When you have a built-in advantage compared to others
Domain expertise and inside knowledge can give you an informational advantage. A unique asset or insight can give you a strategic advantage. A unique skill or passion can give you an operational advantage.
Be careful not to over-estimate the value of your advantage. Get outside assessments and focus only on the value above and beyond what others have. There is no absolute advantage, only relative advantage.
Make sure the size of your advantage matches the size of the opportunity. A slight advantage in a heavily uncertain environment does you little good.
When using a portfolio strategy and you can estimate the uncertainty & return
When you have a high level of uncertainty, one strategy is to diversify. Instead of picking a single option, pick several and spread your resources across all your options. While some choices will fail, as long as others have big enough successes, you’ll come out with a positive outcome in the end.
Make sure you have enough resources to invest in each option, whether that be time, money or energy. If you spread your resources too thin, you may force failure on options that would otherwise be viable.
Be able to measure uncertainty and return, even if they’re rough or qualitative measures. Your return for the options that succeed must be great enough to account for the ones that fail. Without having some idea of the returns you’ll get for your successes, or the chance of failure, you’ll just be gambling.
When you can take the risk and gamble
If you can’t or don’t want to do the above strategies; and you have nothing to lose or you can afford the loss, go ahead and embrace uncertainty. Just understand that you’re gambling, not making strategic decisions.
Uncertainty can be valuable. But it also has its risks. Just make sure the return is worth the risk.
What strategies do you use to mitigate uncertainty in your decisions?