Uncertainty, randomness, and risk. These are the notions of business and life I have been researching of late. The GFC, and its personal impact, has caused me to look deeper into my own decision making processes, risk appetite and my own definitions of what I want out of life.

Having started a business during a boom time, with what I thought were 3 back up plans, all of which went south, at the same time. I can recall talking to a friend saying, well what’s the likely hood of that happening. Well it tuns out that these events do happen, when things go wrong, they usually go very wrong.

It’s very easy to get into business arrangements, but very difficult to get out of them.

So being an avid reader, I went in search of a greater understanding of what led me to these decisions and how I can learn from these times and improve decision making in the future.

I read Fooled by Randomness and the Black Swan by Nichlas Nassim Taleb, this really gave me some important insights into risk and uncertainty. Being involved in improving businesses, project management and private investment, my world is filled with making decisions under uncertainty. Taleb’s books really woke me up to the idea that there is much we don’t know about business, and what we don’t know adds up to randomness and uncertainty.

Hindsight

Too often I have looked to optimise by investments and cash flow’s, being an optimist by nature. This has resulted in excessive risk, that in hindsight I should have recognised.

Ah, that wonderful word ‘hindsight.’ Well, given my knowledge base and disposition at the time, what other decisions could I have made. I think we learn by making mistakes and essentially this is the life of the entrepreneur. Heuristicly, learning by doing. The phrase ‘trial-and-error’ much to my distaste involves error.

We make up stories about the past and attribute qualities to people who have experienced success that really didn’t exist. Or at least the people who failed and ran into problems also exhibited. To explain and rationalise why things happened we make up stories, often looking to blame, rather than looking for cause. But even then the cause may not be clear. That is to say it is a random event, that no one could have known – except perhaps for Murphy.

As business leaders, whether in corporate management making strategic decisions, or the operational manager we are faced with Murphy. That things can go wrong, and because they can, they probably will.

The notion of efficiency and optimising is pervasive in our business world. The notion that a critical machine in a production line might go down causing customer orders to go down means we must have back up plans, or build in buffers to protect production.

Maintain Buffers

I have been studying the Theory of Constraints (TOC), lately and what has struck me is the pragmatic way in which they address uncertainty with buffers. Known as ‘buffer management’ in the vernacular. Maintaining buffers is not in any way efficient, it means resources standing idle, it means capital not being used in inventory.

But when applied at the critical point, it makes perfect sense.

For example, if we have a deadline to finish a task in 4 weeks, it makes sense to finish it a week before in case issues pop up in our life, or the task is more difficult than we expect and so on. All of these things are entirely possible, nay actually probable.

So in our investment decisions it make sense to carry cash, more than we probably need for an optimal investments strategy.

On Debt

It also means that we should carry little if any debt. I have never carried consumer debt. That one always made sense to me. But using debt for investment and increasing returns was something I was into. Optimisation.

But look where this has got us. Banks with way to much gearing, investors the same, consumers just the same.

Consider as I stated before that is things can wrong they probably will, and that having debt funded investments is risky, then it makes sense that one day the deal will come unstuck.

Consider Warren Buffett, one of the richest people in the world, who has made this achievement, as I understand it with little to no debt. And it makes sense. What is another $100m, or $10m, or even $100k in return from a deal with debt funding when it exposes one to such dramatic losses.

Maintain Options

Strategically we don’t really know which ventures will take off and which wont. Sure we put plenty of due diligence into ventures, but there are a host of unknown. This is the paradox, we much invest to grow, but we have no idea where the investment should be. So it makes sense to take many smaller positions in related (but different enough) opportunities to allow for the one of them to flourish.

Chances are that one will, while the remaining will probably peter out. Lost investment? Whose to say, you had to be in it win it. To find the positive black swan.

Go Out and make connections

This is the essence of marketing and sales. Get out there, turn over the rocks, make connections, do the speeches, blog, go to parties.

You never know where the opportunities will come from.

So here is the summary of my learnings to manage uncertainty:

• Maintain buffers: Protect yourself, tasks, investments with buffers.
• Eliminate debt: even for investments, constantly work to eliminate debt. Save to invest:
• Focus and have meaningful discussions about risk:  ask what could go wrong, what is the probability and what is the impact of the outcome. Don’t go through the motions, really pay attention
• Expose yourself and business to positive black swan events, which have very little cost, and massive upside. Go to parties, lots of marketing activities. As much as possible.
• And as Taleb says: Go to parties