Certainty and uncertainty have been at the forefront of many ideas. Predictions with analysis always has been an interesting topic in a variety of fields. And the book mentioned above emphasizes that while we do have to live with unanticipated situations, we can always reduce the risks involved with proper analysis and decisions. What is an unanticipated situation? Something which was not visible to the observers in the initial stages(?). It might be due to lack of data or due to change in the nature of current data. It might also be due to incorrect assumptions in the analysis. So, the prediction of such situations is basically a process to find out the probability of correctness of the data, the assumptions, and the process of analysis. (This later forms the basis of later assumptions and analysis - so, an error in the previous analysis may get carried forward.)
The topic of Subways and Coconuts is mentioned because of the difference in the probabilities of correctness in predicting events related to them. You can do research and be relatively sure that the subway will be predictable most of the time. On the other hand, you know that coconuts fall from trees, but you can’t predict when they will fall or where they will land. So, you can plan for the subways, but it is difficult to plan for the coconuts. Although for the common man, it is really true, but if you are analyzing the falling of coconuts, you can still predict their falling by looking at the wind speed, the stage of growth of the coconut, and some other factors that we generally ignore or which are generally not as visible as the variables around a subway. (This point is slightly missed out by the authors.) So, the secret to predicting the falling of a coconut is to look at more variables that can impact your experience (of being hit by a falling coconut) that are not as visible but as important. (How many times do we think of wind speed when we are trying to predict the falling of a coconut?) All uncertainties and the associated illusions can be predicted to expected or near-expected levels of accuracy - they do not really remain uncertainties nor illusions then! Read on below..
Could we have predicted the economic slowdown then? Yes if we had all the variables and parameters with us - which is not always the case. There are many parameters and variables we should have (could have) looked into. Since it is not possible to look into all of them, we really need to focus on things where we have larger control and manoeuvre things so that the ones which we cannot predict have a lesser impact on the overall aim of our analysis. Financial domain is some place where all the variables may not get defined with the appropriate weights in the beginning.
I appreciate the efforts of the authors to put a complicated topic in a simpler manner, and show how risk management forms an integral part of the daily life of the common human. They have also pointed out the importance of accepting the fact that there are things beyond our control (we will never have all the variables). The book is authored by Spyros Makridakis, Robin Hogarth and Anil Gaba. To quote the Insead review:
First you accept that there are things you can’t control. Then you try to assess the uncertainty and finally augment your plan to make sure you manage risk more effectively.
That means using models, independent opinions, internal and external advice and any other means to assess the unknown risks and to make your business nimble and open to change when the unexpected happens.
“You are better off focusing your energy on planning for the range of possibilities that could actually happen,” Gaba says.
For example, he says it’s very difficult to tell which start-up businesses will be successful in the early stages. If you accept that, a better strategy is to try to diversify over a number of projects just as venture capitalists do. Not all the projects will pay off but you diversify your risk so that you have a better chance of nurturing one that will succeed.
By all means, a very good book to mentally and technically prepare you to manage risk in a more calculated (or prepared) manner than now. It covers a variety of domains and gives you tools to handle uncertainties in life, and particularly in business. Deal with chance or rather dance with it!
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