What is Agile Risk Management? (Part 2)

In my last post, we discussed the nature of Knightian risk and how Knightian risk is the domain of traditional risk management. Today we discuss Knightian uncertainty.

Knightian Uncertainty: Dicier than dice

Unlike risk, with uncertainty you don’t know the probability that an event will occur. Consequently, you also cannot calculate the value of an outcome. In the face of uncertainty, people often grow fearful, pessimistic, and overly cautious. Our natural risk aversion increases. For example, right before the first gulf war, when there was uncertainty about whether or not war would be declared, the stock market tanked. When war was declared, the market rose. The uncertainty about what might happen seemed “riskier” to the market than the more negative of the two possible outcomes. Although unbounded possibility may seem the ideal set of circumstances when we are 13 years old, the threat of living in “interesting times” grows more foreboding with the years. People tend to avoid uncertainty or deny uncertainty exists when it can’t be avoided, and who can blame them? Would you join a dice game where you could never know the likelihood of throwing a winning (or losing) combination?

Agile Risk Management SolutionsIQAs we discussed in my last post, when we believe we know enough to take a calculated risk or make a good bet, risks are perceived as discrete, comprehensible, and countable. We assume we have sufficient knowledge to measure the magnitude and the potential cost of our ignorance.  In an uncertain state, however, we don’t know what we don’t know. Knowledge is insufficient to calculate risk or circumstances are too unstable to make predictions on the basis of causal analysis. Risks are intangible, of unknown magnitude, and unpredictable.

Since we can’t identify or quantify risks with any confidence, traditional risk management techniques don’t provide much help. For example, you can’t create a risk/threat matrix if you can’t identify the risks or estimate their likelihood. If you can’t measure your risk, you can’t predict the likelihood of success. Therefore your ability to justify your project (or whatever you are considering doing) on a rational basis (i.e. via the application of deductive analysis) is diminished, if not eliminated. If you can’t prove that it is rational to proceed, proceeding anyway would seem to be irrational. Or to put it differently, the only rational course of action is to do nothing.

This is pretty much what we see all around us today. No one wants to do anything, the pundits tell us, because things are too uncertain. U.S. companies are sitting on record amounts of cash and are not hiring new workers or making new capital investments because of uncertainty. It’s hard to make progress when doing nothing is your first choice, and sometimes we don’t have the choice to do nothing.

Let’s take stock of what we have discussed so far. Frank Knight segmented risk (broadly speaking) into Knightian risk and Knightian uncertainty. Under conditions of Knightian risk, there is sufficient knowledge and stability to successfully apply the tools of logical analysis (e.g. traditional risk management techniques). However, under conditions of Knightian uncertainty, too little is known or things are too unstable for such tools to be successfully applied. From a traditional risk management perspective, the best course of action is to wait it out until the state of Knightian uncertainty is replaced by the more favorable state of Knightian risk. Are there other alternatives?

Managing through uncertainty: An alternative approach

Within the domain of Knightian risk, Agile and traditional risk management approaches may differ in technique but not much in purpose: reduce variance in results by controlling anticipatable risks. The difference in techniques employed and whether they are complimentary or redundant is the subject of most discussions that compare Agile and traditional risk management. This is an interesting and useful discussion, but not the subject of this series of post.

However, when it comes to Knightian uncertainty, the respective purposes of agile and traditional risk management approaches are profoundly different. The traditional approach painstakingly avoids Knightian uncertainty and if it can’t be avoided provides no mitigation. In contrast, the Agile method is designed to confront, even embrace uncertainty.

Both approaches recognize that under uncertain conditions, circumstances can’t be managed or controlled as they can with Knightian risk any more than a storm at sea.

And like a storm at sea the best you can hope for is to effectively manage through it, minimize damage, adapt to rapidly changing conditions, expect to be blown off course to parts unknown, and be prepared to make the most of it.

Unlike traditional approaches, Agile methods are built from the ground up to help you successfully manage through uncertainty, so that you not only survive but thrive. To set the stage for our later discussion on how agile techniques help us navigate uncertainty, let’s first zero in on how Knightian risk and uncertainty are related, especially in the real-world context of projects, the topic of my next post.

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