Module II·Article III·~1 min read
Decision-Making Under Uncertainty
Decision-Making Under Pressure
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Three Types of Unknowns
Economist Frank Knight distinguished:
- Risk: the outcome is unknown, but the probability distribution is known. Rolling a die is risk.
- Uncertainty (Knightian): the probabilities themselves are unknown. Most business decisions fall here.
- Complete Unknown: "unknown unknowns"—we do not know what we do not know.
Psychological Reactions to Uncertainty
People tolerate uncertainty differently. Low tolerance for uncertainty → tendency toward premature decisions (closure), avoidance of complex problems, overconfidence (filling the void with certainty).
Useful Frameworks
Expected Value vs Expected Utility: mathematical expectation vs psychological value considering risk aversion. For major stakes—utility matters more than EV.
Pre-mortem: "Imagine that a year from now the project has failed. Why?" Reduces excessive optimism, allows for risk identification in advance.
Reversibility test: Is the decision reversible? If yes—decide faster and learn. If not—invest in analysis.
Bayesian updating: start with prior probability (base rate), update as new data comes in. Do not wait for complete information—make decisions iteratively.
Managing Regret
The Bezos test (Amazon): "When I am 80, looking back—what will I regret more: that I tried and failed, or that I did not try?" Helps distinguish fear of uncertainty from a real assessment of risk.
Practical Assignment
Choose a decision you are postponing because of uncertainty. (1) Is it risk or uncertainty? (2) What data will really help, and what is being gathered 'for reassurance'? (3) Is the decision reversible? (4) Conduct a pre-mortem: why might it fail?
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