Dealing with Uncertainty
Uncertainty is inherent within risk management. But what is uncertainty in the context of risk? This question is one that is pondered by academics and practitioners globally.
Uncertainty and risk are terms that sometimes de-coupled, that is that they are treated separately for assessment and quantification. When considering risk management, we are considering possible futures and what could occur. There is inherent uncertainty with anything that we project into the future.
The way that we manage risk is driven by uncertainty. Remember that risk is defined as the effect of uncertainty on objectives. It is the potential for loss or the negative impact on objectives. It is the combination of the likelihood of an event occurring and the consequence of that event.
Uncertainty, on the other hand, is the lack of clarity or lack of information about an event. It is the unknown or unknowable aspect of a situation. In the context of risk management, uncertainty can refer to a range of factors that are unknown or unknowable, such as future events, the likelihood of those events occurring, and the potential consequences of those events.
Risk managers can use a variety of tools and techniques to account for uncertainty in their risk assessments and risk management processes. One common approach is to use probability distributions to estimate the likelihood of different events occurring. For example, a risk manager might use historical data to create a probability distribution for the likelihood of a risk event occurring in a certain location. This can help the risk manager understand the range of possible outcomes and the likelihood of each outcome occurring.
Another way that risk managers account for uncertainty is by using scenario analysis, which involves creating and analysing different hypothetical scenarios to understand how they might impact the organisation. For example, a risk manager might create a scenario where a risk event occurs, and then analyse the potential consequences of that event in order to understand the potential impact on the organisation.
Risk managers may also use decision analysis tools, such as decision trees or expected value analysis, to help them understand the trade-offs and potential outcomes of different decisions in the face of uncertainty. These tools can help risk managers identify the best course of action given the level of uncertainty involved.
Example Scenario
Let’s consider a railway transport corridor running along the coastline. There are a range of potential consequences, from minor flood waters on the track through to erosion and wash away of the foundations and associated track.
Photo Credit: David Gubler / International Railway Journal
Using historic flood information can inform probability distribution, that can then be projected into the future. This provides a way to quantity some of the uncertainty in likely occurrence of a flood event.
Alternatively using the scenario analysis approach, specific consequences such as minor flooding through to foundation wash away could be considered. This would provide a range of outcomes that could be assessed, and rated for risk.
When considering the potential ways to evaluate and treat risks, decision analysis tools could be used to look at the risk that remains from differing decisions in the face of uncertainty. For example, the placement of a small wall along the railway corridor could help to reduce nuisance small flooding events, however it could increase the consequences from larger flooding. Decision analysis tools would help showcase these uncertain potential outcomes, enabling consideration within decision-making.
Uncertainty can be difficult to quantify, however the above tools support this process. Along with these tools, assessments of ‘confidence’ are also used to showcase uncertainty. If we think about something very common to us all, the weather report, the confidence bands change with increased time into the future. This is because there is more uncertainty in the weather 3 days out than 3 hours out.