Uncertainty Versus Threats

“The market hates uncertainty.”

I doubt anyone even blinked as broadcasters shared this thought last night, after the stock market closed down almost 2%.? Major declines in the market are routinely attributed to investors’ aversion to uncertainty.? Moreover, there’s plenty of it to point to these days.? From Ukraine to Washington to egg prices to the housing market, it’s not hard to spot a source.

Still, it’s hard to suggest these sources were hidden on Thursday.? Moreover, Friday wasn’t a big news day.? There was no single headline – or even a group of headlines – that warranted the sizable drop.

So, what changed overnight?

We did.? And more specifically, how investors viewed the world around them.? What was seen as abstract uncertainty on Thursday became a tangible threat on Friday.? With that, investors’ feeling of vulnerability rose sharply.? In response, they sold.

Uncertainty gets a lot of press these days.? Investment advisory and news media ads routinely drip with phrases like “In these uncertain times…”? While a powerful affirming reminder of how many now feel, “uncertain times” feels like a broad, emotional weather report for the general environment around us.? While the term feels specific, it relates to something highly abstract.? It’s like a “Beware of Bears” sign at a campground.? Yes, things feel uncomfortable, but there’s no reason to panic.

At a campground, why we don’t panic has everything to do with psychological distance, and, more specifically, how far away the bear feels to us – in distance, in time, and in tangibility.? A bear on a far-off mountain is highly abstract.? As a result, we can choose to ignore it – particularly, if we have other things to focus on.? The one outside our tent, though, whose breath we can all but feel through the thin nylon fabric around us, is real.? That bear is physically, temporally, and tangibly very close to us.? With that, it has moved from representing abstract uncertainty to being a real threat.? In response, we feel intensely vulnerable and act accordingly.? We panic.

As much as general uncertainty may bother us, we are generally disinclined to do anything about it.? Its psychological distance makes it easy for us to ignore, discount, overlook, and recast.? It is a battle to fight another day, if at all.? Uncertain times can go on and on before anything happens.

Real threats are a different story.? We must respond – and quickly.? To not act is to allow ourselves to remain highly vulnerable.

Given the sharp differences in how we respond to these two forms of uncertainty, you would think that it would require a lot to move us from one to the other.? It doesn’t.? Our cognitive bucketing is highly subjective.? It’s all about how we feel.? Moreover, and as experienced campers know, our feelings can change in a heartbeat.?

The phenomenon I’ve just described is no different with crowds, either.? As we saw in March 2020, what one moment represented abstract uncertainty became an all-too tangible threat to an entire nation in a flash. ?On the evening of March 11th, when Tom Hanks and Rudy Gobert were said to have COVID, Americans panicked.? As reporters shared in real-time, that night, the disease “became real.”

More recently, depositors at Silicon Valley Bank shared a very similar experience.? Within hours, the risk of a bank failure went from being highly abstract to a real threat.

Which brings me to my punch line.

Today’s leaders need to better prepare their organizations for those potential moments when abstract uncertainty becomes a real threat.? The current backdrop of widespread anxiety cautions such a moment is highly likely.? Even more, leaders need to better appreciate that thanks to social media, changes in confidence fly through a crowd faster than ever before.? Leaders who think they will have the opportunity to prepare a thoughtful response when abstract uncertainty becomes a heart-pounding threat are na?ve.

Today, leaders must think and act like emergency room doctors.? They must be prepared for whatever real threat is next.? In uncertain times, the only thing that is certain is that something unexpected will come through the door.? And in that environment, only those who have prepared for the potential bear attack will survive.

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Peter Atwater is an adjunct lecturer in Economics at William & Mary and the author of The Confidence Map: Charting A Path from Chaos to Clarity.