Risk is a seemingly simple word that confounds most organizations when it comes to achieving strategic outcomes. We prefer the word uncertainty. Strategic decision-making is a good place to start when developing a comprehensive approach to handling uncertainty.
But things worked out – because individuals behaved in certain ways with integrity and resilience. They figured out how to work with other people, and they tried to do the right thing. And my hope is that these stories will inspire some readers to behave the same way in the face of the uncertainty in their lives.”
- David McCullough, Pulitzer Prize and Presidential Medal of Freedom Winner
Quoted in “What’s Keeping David McCullough From Sleeping”
By Thomas H. Lee, Wall Street Journal, March 26, 2018
Our last section told the story of how few, if any, people have profited more from working the principles of uncertainty in their favor than Warren Buffett – the so-called Oracle of Omaha. Truth be told, Buffett made the decision to own insurance companies because he disliked the uncertainty inherent in raising capital through private equity, investment firms and hedge funds. Instead, Buffett fell in love with the certainty of receiving other people’s hard earned cash in the form of insurance premiums and then making money by investing the cash in stocks, bonds and other securities. The more cash received that had not been paid out yet for claims and expenses, the more investment income Buffett could generate and keep.
Our intent is not to criticize Buffett or the insurance industry. Instead, it’s to incentivize business leaders to master the principles of uncertainty in the way that Buffett has and for our insurer friends, that’s just good news because less uncertainty means fewer and less costly claims which, in turn, means higher profits. Buffett’s example reminds us that perhaps the best way to manage uncertainty is to improve our ability to make strategic decisions. Warren Buffett decided that he disliked having to ask other people to lend him money to make investments. He recognized that policyholders must pay on time – there is no asking or persuasion involved. In other words, if you don’t pay the premium, the insurance contract is void which impairs your ability to drive, buy a home, or operate a business.
If uncertainty is about decision-making, our focus should be on controlling the quality of our decisions. Good decisions will bear fruit for some time to come and bad ones may haunt us. Nothing tests the skills of business leaders more than the ability to make quality decisions and getting better at decision-making is something we spend a lifetime doing.
The past two decades have witnessed a substantial increase in general knowledge about instinctual, intuitive decision-making (e.g., Daniel Kahneman’s Thinking Fast and Slow and Malcom Gladwell’s Blink). But how do we get better at serious deliberation? By serious deliberation we mean the strategic, complex and long-term decisions that business leaders make and the same kind that everyone makes in life: picking a college, choosing a career, deciding whom to marry and when to have children. These fork-in-the-road moments may forever alter the future for better or for worse.
How does a wise business leader approach uncertainty? What principles and strategies are needed to excel at long-term thinking? Are there evidence-based techniques and processes that good business leaders learn to better handle uncertainty that transcend the skills for instinctual, intuitive decision-making? We concur with the assessment of Steven Johnson, a bestselling science writer and host of the Emmy-award winning PBS series How We Got to Now, that a new field of science is emerging that is focused on these very questions. Johnson’s latest book is entitled Farsighted – How We Make the Decisions that Matter the Most (2018) and it explores various sciences – management theory, cognitive neuroscience, behavioral economics, sociology, psychology – and then bridges those sciences with the humanities, all in an effort to create a broader and multidisciplinary conversation about decision science.
Over the next few sections, we will follow Johnson’s lead and explore several important principles to decision science and the field of risk management. Before starting that journey, let’s pause and agree with Johnson’s thesis that not only is decision science a new field, but we should start creating high school and college courses that teach the art and science of complex decision-making. The ability to form and lead multidisciplinary groups that make the right choice when it really matters is a skill that will become increasingly valued as more and more leaders realize that handling uncertainty is really about learning how to decide better.