Understanding Uncertainties, Unknowns, Black-swan effect

Abstract: The COVID-19 outbreak has introduced a global wave of fear rooted in the uncertainty and the terms that are haunting to us are — unknown-unknown risk and black-swan effect. Why are they calling this outbreak as unknown-unknown risk and we are facing swan effect? How are we supposed to handle this unknown uncertainty?

As a project manager, we deal with uncertainties every day and strive to bring order to it, we can utilize our backgrounds and perspectives to address three aspects of the issue: 1) the uncertainties, 2) the unknown-unknowns, 3) the black swan effect. This awareness may help you to form a structured way of thinking to stay on top of uncertainties and examine alternatives to determine underlying threats or benefits so that the right course of action can be taken without panicking.

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Almost overnight, everything has changed. 

Disneyland — closed. Schools and universities — closed. The Metropolitan Opera — closed. Ceased as well are the activities of small businesses and daycare centers, Broadway theaters, Apple stores, local libraries, ski resorts, March Madness and NBA tournaments, and a plethora of our kids' extracurricular activities.

Amid deepening uncertainty over a spreading coronavirus, growing anxiety about an economic meltdown, impacts on the sporting world, and major impediments to our daily lives run rampant. To soothe worries, people Google for answers — but ominous search results saturated with suffocating news of rising death counts, stock market crashes, major event cancelations, school closures, and mass-quarantines incline people to succumb to the growing atmosphere of fear.

Our brains are wired to feel anxiety in the face of uncertainty, especially when the events are unprecedented and the stakes are high. We live our lives pursuing our desire for safety in certainty, and the world around us is clearly indicative of this lifestyle. Take, for example, our experience of a certain level of skepticism going to a restaurant without reading reviews, or driving to a new place without checking Google Maps. Having this knowledge certainly makes us feel more comfortable, in comparison to a situation in which we lack such firmness in belief about the place we are going to. And it turns out, as many of us know, panic is often our default in situations in which we lack the certainty of our destinations, whether it be on the road, or in the paths we forge in our everyday decisions.

In terms of the COVID-19 outbreak, one of our greatest concerns is that we don’t truly understand, and thus have not planned for, the impact of this crisis on our social fabric, educational systems, and professional and family lives. Like the confusing wilderness of our nightmares, it is like we are living in a world full of biologically inclined chaos — instigated by uncertainty.

"It is the unknown we fear when we look upon death and darkness, nothing more."

—Albus Dumbledore

The terms that are haunting to us are — unknown-unknown risk and black-swan. We are wondering why experts call this outbreak as unknown-unknown risk or facing the “black swan”? What do these terms represent? How do we comprehend their significance? Will this uncertainty change everything? And how do we deal with this uncertainty?

From a risk analysis perspective, fear and worry are legitimate reactions, given the lack of understanding surrounding the level of uncertainty surrounding such circumstances. However, we acknowledge that there is a fine line when balancing between reacting rationally with mindful precautions and succumbing to a frenzy of uncontrollable panic. For that matter, the first step to tackling such situations is to understand the level of uncertainty at play. And oftentimes, more than simply acknowledging the certainties of the situation, being aware of this level of uncertainty proves far more useful.

Wisdom doesn’t emerge from knowing with certainty, but from being aware of your level of uncertainty.

Let me take you back to 2002. On February 12th, at a press briefing, addressing the absence of evidence linking the government of Iraq with the supply of weapons of mass destruction to terrorist groups, the United States Secretary of Defense, Donald Rumsfeld, said the following:

“There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know.” 

Now, Mr. Rumsfeld's logic may be tongue-twisting, his words have inspired many to pursue a better understanding of the nature of hard-to-detect risks and uncertainties.

Clearly, ‘there are things we know we know, there are things we know we don’t know and there are things we don’t know we don’t know’. Effective risk management focuses on reducing uncertainty where possible and moving the ‘things’; i.e., uncertainties, up the scale, from ‘don’t know we don’t know’ to ‘know we know’, and as a consequence can manage!

• Known-knowns: What we currently know. These are facts.
• Unknown-knowns: What we don't know, but known to someone else. These are hidden facts. 
• Known-unknowns: What we know that we don't know. These are identified unknown facts.
• Unknown-unknowns: What we don't know that we don't know. This is ignorance.

So what is uncertainty? Uncertainty is a lack of or insufficient knowledge about something.

The more you know about such uncertainties, the better prepared you will be when it comes to tackling the risks and consequences that come with it, proceeding from a secure position to make the right decision. The less you know about it, you will be stuck, worried in a world of confusion.

So... what is a risk?

A Guide to the Project Management Body of Knowledge (PMBOK) defines a project risk as, "an uncertain event or condition that, if it occurs, has a positive or negative effect on a project’s objectives”. 

And according to the international ISO standards, a risk is the “effect of uncertainty on objectives” and an effect is a positive or negative deviation from what is expected.

Risk management explicitly addresses all uncertainty. However, for programs or projects, not all uncertainties qualify for our attention or action. The task of risk management is to find and address those uncertainties based on their likelihood (probability) and influence (impact) on objectives. “Probability” is the measure of how uncertain something is. The “impact” is the measure of how much it matters. For example, when opening a data-center in California, should I be worried about the risk of hurricanes as a legitimate concern? Hurricanes most definitely pose situations of uncertainty with resounding impacts, however, in this case, its low likelihood, or probability of occurrence deems it not a significant risk in California and is, therefore, negligible.

So in a nutshell, all project risks are uncertainties that matter.

Us project managers deal with uncertainties every day and strive to bring order in the face of it; obviously not to the magnitude of hurricanes in California, as relevance matters, but we strive to manage each uncertainty nonetheless. In order to manage uncertainties, we must understand them first, so we can make better decisions. All programs or projects are by definition uncertain – If we are to give our projects the best chance of succeeding, every uncertainty needs to be proactively identified, assessed and managed. Unmanaged risk results in project failure. 

How do we deal effectively with risk based on current understandings of “how the world works” in today's business environment, whilst recognizing the impossibility of actually predicting the future to eliminate all risk?

“You’re gonna need a bigger boat”— This line of dialog from a truly iconic film, Jaws, is a testament to the quintessential idea that we need to get a good glimpse of the shark before fighting it.

Risk management has constantly been evolving, from the mid-seventeenth century using many mathematical processes like classical statistical approaches, to today's modern applications with emerging technologies such as AI. These theories suggest projects are subject to four types of risks. One of them occurs due to uncertain future events and the other three occur due to uncertain conditions promulgated by ambiguity, variability, complexity, etc.

1. Stochastic uncertainty - also known as Event risk
2. Aleatoric uncertainty - also known as Variability risk
3. Epistemic uncertainty - also known as Ambiguity risk
4. Ontological uncertainty is also known as Emergent risk

Let’s look at each one by one —

1. Stochastic uncertainty, AKA event risk:

These are uncertain future events; something that has not yet happened and that may not happen at all, but if it does, then it has an impact on one or more project objectives. The mathematical term for such uncertainty is called Stochastic uncertainty. "Stochastic" comes from the Greek word stokhastikos, meaning able to guess. In Greek, stokhos literally means "a stick meant for archers to shoot at a target" (either you hit it or miss it). The "guess" part represents unpredictability, given its randomness. PMBOK refers to Stochastic uncertainties as “event-based” risks. These are commonly identifiable, quantifiable and manageable project risks. Examples of event-based threats and opportunities include:

i. Losing a resource, just when you need them on your project. We may or may not lose it, but if it happens it will impact the schedule.

ii. New regulatory constraints might be imposed. It may or may not occur, but if they do, it may pose an opportunity or a threat.

2. Aleatoric uncertainty, AKA variability risk

The uncertainty is not in the event. The event will occur, but the uncertainty lies in the outcome. The outcome varies based on the uncertainty of the condition in which the event will occur. Since there is variability in the outcome, it’s called variability risk. We just know something will happen, but we don’t know what. It’s like throwing a dice. When you throw a dice, you are certain to have a number, but you just do not know which number. Aleatoric uncertainty is named after Alea, a game of chance with dice in Greek. 

Some examples include: 

i. If we are building on a construction site and we are going to dig a trench, then we know “we are going to dig a trench”. But what will we find? Will it be a regular soil? Will there be rocks? Will there be a buried treasure? We don’t know. So the effect of the uncertainty is what’s down the trench. A future event is certain: we dig a hole. The effect is not certain: what we find in the trench could be a number of things. However, what is important is that what we find could determine the outcome of the project.

ii. Depending on the number of defects during testing and how long the fixes may take, the project schedule may be impacted.

3. Epistemic uncertainty, AKA ambiguity risk

“unknown, but knowable-unknowns”

In some situations, there is so much ambiguity that we are not quite sure about something. We know there is something there, but we can’t quite see what it is. We have limited to no data and/or knowledge about it. In order to know what we are facing and how we can mitigate it, we need more information -- more details. These are neither “uncertain future events that may or may not happen”, nor are we “doing something and we don’t know what the outcome is”. This uncertainty is the scenario where something happens we don’t understand it. Very often, in innovative projects in entrepreneurial organizations (in agile projects) we’re faced with ambiguity. And as we go up from projects to programs to portfolios to strategy, ambiguity increases. Since the source of this uncertainty is an ambiguity which is due to the lack of data and knowledge, or a lack of “epistemic” certainty (Greek for "relating to knowledge or its degree of validation"), this type of risk is called ambiguity risk, or Epistemic uncertainty. Areas of the project where imperfect knowledge might affect our ability to achieve project objectives include:

i. Use of new technology: Let’s say there is a new regulatory framework expected. But you don’t have perfect knowledge of it. Hence, you are not clear how this new regulatory development is going to impact your project. This presents ambiguity.

ii. Market conditions

iii. Competitor capability or intentions

4. Ontological uncertainty, AKA emergent risk 

Lastly, we have some risks that emerge from our blind-spots. Emergent risks are things that arise on the scene that we weren’t expecting and that we weren’t prepared for; things that we had not predicted, and are big, meaning that have very extreme impacts they might be very bad or very good, depending on whether or not you saw them coming. The interesting thing about our psychological tendencies regarding this is that, in retrospect, the events appear obvious, despite the outcome being far from it as they unfolded.

The other name for these risks is “unknowable unknowns,” as they are unknowable in advance. They emerge from the fog of the future and surprise everybody. They're also called “ontological uncertainty”. The Greek word ‘logy’ means to study and ‘onto’ means existence. Ontology deals with questions about what things exist or can be said to exist.

But more commonly, they are known to us as black swans. Why are they called black swans?

Not long ago people could imagine only white swans because white swans were all they had ever seen. And so people predicted that every next swan they would see would be white. The discovery of black swans shattered this prediction. The black swan is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. Black swans are emergent and unknowable. They have very extreme impacts which might be very bad or very good, depending on whether or not we saw them coming. We could look back and see some examples, such as the invention of the internet — unforeseeable until it happened everything changed — or in the late 90s and early 2000s, when we had the rise of Google and the rise of social media through Twitter and Facebook and other similar platforms. The great financial crisis in 2008 is another example of a black swan that changed everything. The 9/11 terrorist attack in New York in 2001, leading to chaos in American daily life and the economy at the same time, enhanced aviation security. The old certainties are no longer certain, and changed everything then, still affecting us today.

Based on a study of international risk governance council, 12 triggers were listed as causes black swans: Scientific unknowns, Increased pace, Connectedness, Varying vulnerabilities, Conflicting interests, Social dynamics, Technological advances, Time-based issues, Inadequate comm, Unbalanced information, Unhelpful motivators, Malicious behavior.

Here we are...in the unknown territory!

What we are facing is something we had not considered a possibility at all, before it suddenly arrived on the scene: the emergence of the COVID-19 outbreak. We are left to deal with it without knowing what's next. We must understand, it is a once-in-a-century pandemic and we are facing unknown-unknowns. The “black swan", that unforeseen event that nobody appears able to quantify or fully comprehend, that changes everything, is upon us.

1. To date, there is no vaccine and no specific antiviral medicine to prevent or treat COVID-2019. 
2. Possible vaccines and some specific drug treatments are under investigation. And we know, vaccines or affordable treatments take many months (or even years) to develop and test properly.
3. Given such timelines, the consequences of long-term lockdowns are entirely unknown. We truly don’t understand and, thus, haven’t planned for, the impact of this crisis on our social fabric, businesses, transportation, educational systems, family lives, and the global economy.

As I mentioned earlier, sometimes, more than knowing about the certainty, being aware of the level of uncertainty is more important, in the pursuit of better dealing with it.

Now that we know what we are dealing with, read my next article to know how to deal with them...

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"My prayers and greatest wishes for the safety and well-being of everyone affected by this crisis. I pray and hope that all of you stand strong and concur with the natural catastrophe well. We all are strong and have the great power to solve this unexpected situation." 

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Related Links:

https://www.coronavirus.gov/

https://www.cdc.gov/coronavirus/2019-ncov/cases-updates/summary.html#risk-assessment

https://www.who.int/docs/default-source/coronaviruse/srp-04022020.pdf