The cost of uncertainty calculated in dollars and cents

The Financial Cost of Uncertainty

Decision making is emerging as our most critical superpower. This isn’t because suddenly we need to make decisions. We’ve always needed to make decisions but, today, now; the world we live in presents us with a fluidity that increases the level of uncertainty we feel.

Most decisions we make now are more complex, more complicated than they would have had to be in the past. This is because the world is more connected than ever before. Better connections shorten the time that news and changes have to travel. This makes the impact of everything more immediate but the outcome of that impact is harder to quantify. That’s because it can’t be contained and is therefore subject to external forces even as it develops. This only raises uncertainty.

When uncertainty appears, fear follows closely in its footsteps. These two emotions filter every single decision we make. We are naturally risk-averse. Economic theory predicts that when firms face a highly uncertain future, they have an incentive to delay investment and hiring and put off other decisions.

Consider Brexit as a single, tangible example. What is essentially a local political complexity that ought to concern none other than British citizens is, in reality, a more nuanced, complex issue that a Stanford University economic impact study reveals it has affected productivity in Britain (with an average reduction ranging from between 2% and 5%) and the economy (that has seen a reduction in investment by up to 25%).

The Pathway of Uncertainty and Fear

Flowing from the UK’s current inability to break free of it political stalemate, popularly known as Brexit, is a tangible reduction in the “business as usual” mode of operation. This affects businesses in three distinct ways.

  • First, in terms of perception. When we think that things are going badly because we cannot adequately predict the future we are less likely to take action or make plans.
  • Second, in ability to work. Uncertainty taxes our brain creating mental stress. This reduces the brain’s ability to devise new learning or coping strategies and it also reduces the overall amount of energy the brain has available to devote to anything new.
  • Third, in ability to plan. Increased stress caused by unknown unknowns reduces our cognitive ability to think rationally. The higher processing centers of the brain we need most; shut down. As a result the quality of our decision making is compromised.

All of this would be bad enough if it were contained just in Britain. But it isn’t. In a hyper-connected world where the value of the British pound seesaws on perception of stability and its opposite, political decisions (or indecision) have extensive real-world impact. Combined with other political events elsewhere (political regimes in the U.S., Brazil, The Czech Republic and Italy, for example) and specific physical events (the Amazon fires, heavy rains, rising storms) caused by Climate Change they contribute to global uncertainty that is now being tracked by the World Economic Forum in its World Uncertainty Index.

Political ideas like Brexit, national isolationism and even science-denial add to a perception of local stability and uncertainty. This soaks up mental energy. It makes workers feel unable to concentrate on work. This increases their sense of anxiety and their fear of job insecurity. This way what was once only inside the heads of people finds itself being expressed in actions outside them.

Dealing With Uncertainty

Snipers and other elite performers know how to deal with this kind of problem. They face it so frequently that they wouldn’t be able to function and do their job had they not been able to handle it.

Just what mental strategies they use is something I detailed in articles before. The point is that whereas, once, we could rely on outliers like them to be the only ones experiencing that kind of pressure and that level of fluidity and uncertainty, now we are all in it.

The difference is they are trained for this and we are not. It’s time to address this imbalance by actively taking charge of our own personal cognitive development needs.