Uncertainty

Many people are interested in the future value of Apple’s stock price. You don’t know whether it will rise or fall tomorrow, a month, or a year from now. That’s uncertainty — the inability to predict a future outcome. Now consider three scenarios: you own $100,000 worth of Apple shares, you’ve shorted the stock, or you have no position at all. In these cases, the uncertainty about Apple’s price manifests as risk only if you’re exposed. For the shareholder, a price drop is a risk of loss. But a short seller is worried about the price going up. A bystander has no risk at all, even though the uncertainty is the same. And an option holder may have a completely different risk profile. Furthermore, the amount of exposure counts — if you’re betting 50 percent of your money that the price will go one way or another by a given date, you really want to understand the uncertainty. The lesson here is clear: uncertainty is universal, but risk is contextual to each investor and is always negative.

Doug Hubbard, the author of The Failure of Risk Management, argues that conflating uncertainty with risk leads to poor decision-making. By clearly defining and quantifying risk relative to specific goals or exposures, businesses can focus resources on what truly matters while embracing the upside of uncertainty.

Uncertainty: The Bigger Picture

Uncertainty refers to all possible outcomes—positive, negative, and neutral. It’s a natural part of life and business, encompassing everything from unpredictable stock prices to customer behavior in new markets. While uncertainty is unavoidable, it doesn’t always translate to risk.

Take weather forecasts: tomorrow’s conditions are uncertain, but they don’t pose a risk unless you have something at stake—like an outdoor event or a construction project. Similarly, in business, uncertainty becomes risk only when it intersects with your goals or assets. A retailer entering a new market faces uncertainty about consumer preferences, but the risk is the potential loss from a failed product launch.

Doug Hubbard’s work emphasizes that uncertainty can and should be measured. Tools like probability modeling and simulations allow businesses to understand the range of possible outcomes and their likelihood, even when data is limited. Doug shows you can probably estimate uncertainty better than you think, and his programs help his clients do that.

One of the key skills Hubbard teaches is Bayesian calibration, which helps teams communicate better about uncertainty. After training, members of the team use specific terms like “70 percent likely,” “80 percent likely,” 90 percent, 95 percent, and 98 percent (never 100 percent). This helps the team get on the same page on the uncertainty before they talk about risk and risk mitigation.

Quantifying uncertainty is an important part of setting up a decision framework. While most people “go with their gut,” experienced decisionmakers use sharper tools and better systems to make important decisions.