Risky business

Professor Jochen Runde has a radical new approach that could help make the really scary risks – the unknown unknowns – a little more, well, knowable.

CJBS Insight – July 2015
Above: Coffea arabica blanco by Francisco Manuel Blanco (OSA), taken from Flora de Filipinas, Gran edición, Atlas I.

Are you ready for the unexpected? Most of us plan for the predictable: succession, staff, downturn, upturn. But what about an unknown disruptive technology? A breakdown in supply lines? Jochen Runde, Professor of Economics & Organisation, and co-author Dr Alberto Feduzi, Research Fellow in Decision-making Under High Uncertainty, have been working on a radical new approach to help business people think about what are sometimes called “Unknown Unknowns”: the things we don’t know we don’t know.

Perhaps surprisingly, Runde and Feduzi were inspired by the work of philosopher Francis Bacon – who died in 1626. “Bacon’s scientific method involves testing a hypothesis by suggesting alternatives to that hypothesis, and then trying to disconfirm those alternatives,” explains Runde. “The more alternatives you disconfirm, the stronger your belief in the original hypothesis becomes. If an alternative hypothesis is confirmed, then you move to that one and continue with the process.”

This method suggested an alternative to the traditional approach of constructing business scenarios which is predominantly about coming up with possible scenarios and then adjusting them in the light of new information as it comes in.

The problems with that approach, says Runde, is that it is overly reactive, and where people generally are generally too conservative when thinking about scenarios and extremely bad at seeing what they don’t want to see. They stop looking far too early once they see something that looks right to them. They underestimate information that pulls them in directions they might not like. They don’t think about the extremes of possibility, and consequently miss both risk – and opportunity.

“We all have these psychological predispositions to think in terms of what we know already, effectively to be quite lazy at looking beyond what we already know. Can we get over those constraints?” asks Runde. “I think we can – and the method we’re proposing is a way of doing that.

CJBS Insight, July 2015

Playing devil’s advocate to your own plans

Runde and Feduzi have adapted Bacon’s method to use with business scenarios, detailed in their paper “Uncovering Unknown Unknowns: Towards a Baconian Approach to Management Decision-making”, published in the journal Organizational Behavior and Human Decision Processes. It’s not just thinking out of the box, they say – it’s thinking way beyond the box, playing devil’s advocate to your own plans. And unlike the traditional approach that is essentially reactive, what they are proposing is a proactive approach to gathering evidence in which the creation and testing of business scenarios are part of the same process.

“We urge people to imagine possible influences that might lead to business scenarios that are radically different from the one they think is most likely,” says Runde. “But that is only part of the story. The other part is then to encourage them to go out, do some research, and attempt to confirm that those influences could actually become a reality that affects their business. Very often they will not be able to do so. But the point is that by being induced to look for information about extreme possibilities, they will be taken away from the familiar places they would normally be looking and thereby put themselves in a position of learning things that are truly new to them. Effectively, the method we are proposing provides a means to counteract the confirmation bias, as well as many other biases that have been identified by behavioural psychologists. And it can be done on either end of the spectrum – extremely good outcomes or extremely bad outcomes.”

So say you’re a young, ambitious entrepreneur looking to start up a coffee house in the Middle East, against huge competition from global players like Starbucks and Costa. You might think about the risks of not being able to obtain the right staff, or not attracting enough customers, and so on – these are your “known unknowns”. The trouble is that there may be risks you aren’t able to identify – the “unknown unknowns”.

What, for example, if there is something out there that will make your coffee supply dry up completely? It might not sound likely. But it’s certainly an alternative hypothesis. And if you do some Googling on the subject, you’ll quickly find that the wild Arabica coffee plant, which makes up around 70% of the world’s coffee supply, is under threat from climate change – and one study has predicted it could be extinct by 2080. Now you can respond in a variety of ways. At the very least you’d be revising your prior scenarios. But you might also revise your business model entirely. You could market your coffee as a super luxury product. You could find an ethical or sustainable source. Or you could decide that coffee is too much of a risk, and find an alternative business.

Disruptive thinking

“So spend time thinking about things that could completely derail your idea, even if they seems highly unlikely or even a little crazy,” advises Runde. “And the key is not to stop there. Do some research, go to Google or whatever, and find out whether there may be reasons those things could actually become a reality and affect your business. You will often be surprised and find out things relevant to your business that you would not have seen otherwise. I challenged a group of students to come up with a novel business idea that hasn’t been tried before. I don’t know whether the film Gravity had anything to do with it, but what they came up with was garbage cleaning in space – cleaning up all the old satellites and the debris in orbit around the earth, starting a company that shoots this stuff down. I then asked them to think of highly unlikely things that might prove detrimental to a business of this sort, and, thinking they had just proposed something no one had thought of before, one of the things they came up with was that there might already be companies working in the area. I asked them to look and it took them just a few minutes to discover – to my surprise as much as theirs – that there are already companies that have funding to pursue the idea. This kind of experience is not unusual. Budding entrepreneurs are constantly coming up with stuff that has already been done. They expend a lot of resources and then find out, quite late in the day, that there’s someone there already.”

But isn’t it a contradiction in terms to claim you can find out what an unknown unknown actually is? “That makes sense, and that’s why we call it ‘uncovering’ unknown unknowns,” says Runde. He points to the example of the North American Aerospace Defense Command (NORAD) having run simulations of 9/11 style attacks before they actually occurred. While 9/11 may have been the realisation of an unknown unknown for most of us – a “black swan” as Nassim Taleb calls it – it had already been uncovered as a possibility by the agency. So we might all become better at uncovering unknown unknowns if we tried speculating a little more and then spending just a bit of time gathering information to see if our speculations are real possibilities after all. Every unknown unknown uncovered in advance may be one less black swan to blindside us in future.

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