Risk, ambiguity and uncertainty. How do we tell them apart?

Benjamin Wong, Co-founder, Cogito Collective

We had our first Masterclass meeting, over a traditional Singaporean breakfast of kaya toast and eggs from Yakun. It was a cosy morning, musing and sharing about what we learned from the first chapter of Farsighted by Steven Johnson, and how we applied these models into our lives – debating its usefulness vs other models that we have encountered.

This post serves as a summary of the important points we talked about. The points may not always follow a logical fashion.

Risk, ambiguity and uncertainty.

Maybe the unknown unknowns share of the pie should be much larger..
Source:
The Gettysburgian

Risk = known probability distribution over a range of outcomes

You may not know what comes next, but you can see the range of outcomes and predict with a certain probability.

Ambiguity = Unknown probability distribution

You may not know what comes next, and you may not be able to predict how certain it will happen, but you can see the range of outcomes.

The difference now is that you are unsure whether the probability before was, for example, 55%.

Uncertainty = Unknown unknowns

You just really don’t know what’s happening next. You don’t know what outcomes could arise. We could go further – you don’t know that you should be looking for what’s happening next.

Risk = known probability distribution over a range of outcomes
Ambiguity = Unknown probability distribution
Uncertainty = Unknown unknowns

Distinguishing the risk in stock investing from the risk in life

A point was raised about how risk in finance is an absolute loss – which means that there is an absolute number which was invested in, and therefore the loss cannot go above that. Thus, this risk is distinguished from the risk measured by doctors in determining whether you should do this procedure to save yourself from this illness, but face the risk of complications of the surgery. Using the limits of a human life and person, the risk incurred in a stock market game is drastically different from your own life. One cannot compare both probabilities on the same scale.

The human condition – why we are unable to fully de-risk and be farsighted in our lives

We summarised what Steven Johnson said into 3 points on why we are unable to be farsighted:

  1. Inherent flaws in a person – confirmation bias, social needs, etc.
  2. Societal issues
  3. Time and sequence – if we had all the time in the world, we could get all the information and degrees. But, time works against us.

How we can use System 1.5 thinking

Referencing point 3 in the summary above, the idea of time is extremely important, because as in Daniel Kahneman’s reference to System 1 and System 2 thinking, System 1 is reactionary and instinctive while System 2 takes time. On a whole, those who take time to think using System 2 will lead to better results. But, time is not always on your side.

Thus, there are 2 main factors affecting which system is being used – time (the most important constraint), and big impact situations, which will result in people taking more time to make such decisions.

Nobody uses a 100% of each system. Also, not all people who use System 2 are intelligent, as they are unable to spot the blind spots even with more time to consider.

Thus, we introduced a System 1.5 thinking, where our System 2 thinking processes much faster such that it seems like a System 1 from an outsider’s point of view. This requires training to think through blind spots and what-if scenarios in a much faster way when an issue is presented.

How can Singapore be farsighted?

We then turned to talk about our beloved country – Singapore. Most of us grew up here our entire lives, went through the school system, and had many comments about it. Our conclusion was that Singapore must focus from the 0 to 1, not only the +1s, and we need to lose our loss aversion bias.

No more +1, Singapore needs to go from 0 to 1.

In Peter Thiel’s book zero to one, he says that we should create ideas that are totally new, bringing it from zero (dead) to life. This is contrasted to what one of our members said as a +1. Another way of looking at this will be radical vs incremental innovation. We in Singapore have too much incremental innovation that does not shift the needle and make an impact. Most of the startups here do not make a dent because of the mindset that has been inculcated in schools, that a +1 is more to be desired than to go from the illusive 0 to 1.

Losing our loss aversion “kiasu-ism” bias

That mindset, as we are so colloquially familiar with, is kiasu-ism. We grew up in a culture where failure was not looked upon favourably. This is contrasted with Western ideology embodied in Silicon Valley where innovation is systemic and it is okay to fail. In Asia, it’s about saving face. You don’t want to be seen making a mistake.

This is a classic case of loss aversion in Singapore, which in our case should be called kiasu-ism. It is now a bad thing because the fear to lose what we have in Singapore is greater than what is to be gained.

When we look at our smart nation push in Singapore, why has it taken so long?

The fear to lose what we have in Singapore is greater than what is to be gained.

Conclusion

If you were looking for the summaries for Farsighted from our perspective, we will upload them after covering the book. Let us not make the same mistakes as Washington, the 1st President of the United State of America, did when he didn’t want to lose the crown jewel of New York. He stationed most troops there, when the best way not to let the enemy overrun New York, will be to concentrate forces in Brooklyn.

Sometimes, to gain, we have to “lose”. If not, we really lose it all. George Washington was a great man, but to not learn his lesson is a greater mistake.


About the author:

Benjamin Wong is the co-founder of Cogito. His research interests lie in behavioural economics, tort law and industrial organisation. He sees a need for polymathic thinking today which will radically change how we advance as a society.


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