Because life is full of uncertainties, many of the decisions a person will make will involve calculated risks (i.e., investing in a mutual fund, accepting a blind date, deciding to take a loan, etc.) Man can’t snap his fingers to make the uncertainties disappear. But we can raise the odds of making a good decision in uncertain situations. How? The 1st step is to acknowledge the existence of uncertainties. Then you need to think them through systematically, understanding the various outcomes that might unfold, their likelihoods, and their impacts.
Use Risk Profiles to simplify decisions involving Uncertainty
Making decisions becomes even more difficult when there is uncertainty. Numerous uncertainties, each of varying degrees of significance, may be present in a single choice. These uncertainties may then interact in complex ways to produce the final results. To understand uncertainty, you must discover a way to simplify it, separate its components, and assess each one separately. For this, risk profiles may be used. A risk profile captures the essential information about the way uncertainty affects an alternative. It answers four questions:
– What are the key uncertainties?
– What are the possible outcomes of these uncertainties?
– What are the chances of occurrence of each possible outcome?
– What are the consequences of each outcome?
By providing a consistent basis for comparing the uncertainties affecting each of your alternatives, risk profiles allow you to focus on the key factors that should influence your choice, ignoring peripheral factors.
How to Construct a Risk profile
Identify the key uncertainties. Virtually any decision involves uncertainties, but most uncertainties don’t influence consequences enough to matter. Selecting the uncertainties important enough to include in a risk profile requires two steps:
a. List all the uncertainties that might significantly influence the consequences of any alternatives.
b. Consider these uncertainties one at a time and determine whether and to what degree their various possible outcomes might influence the decision. When there are many possible uncertainties, winnow them down to the few that are likely to matter most.
Define outcomes: the possible outcomes of each uncertainty must now be specified. This requires answering two questions:
a. How many possible outcomes need to be defined to express the extent of each uncertainty?
b. How can each outcome be best defined?
The number of outcomes you’ll need to specify will depend on the kind of uncertainty you’re addressing. Some uncertainties inherently have a small number of clearly defined potential outcomes: Which of the two contestants will win the chess match? How many people will attend the Sunday church service? When there are many possible outcomes, you should simplify your expression of them by organizing them into ranges, or categories.
Because complexity increases as the number of categories increases, you should always seek to narrow the set of outcomes down to the fewest possible-enough to fully describe the uncertainty, but no more. Start by defining a small number of outcomes, and then add more only as needed.
To be continued…
