Risk or uncertainty

The drawing represents the cognitive risk model used by Winch in Managing Construction projects (Winch 2010 p. 349). His explanation of the graph is somewhat sophisticated and I will try to make sense of it in this post by using my own words. Maybe it is of help to my students.

It is very good to visualize systems or concepts as Graham Winch does but I do not fully understand the parabolic dotted lines in this one. Maybe you could say the “known or unk” exists somewhere between impossibility and certainty. Maybe you could make a different drawing telling the same. Nevertheless, let us try to grasp it. First the perspective. The perspective is from the viewpoint of the decision maker. And the decision maker could be you being the manager. The known or unk is the possible future incident that could happen (with certainty) or not happen at all (impossibility). Somewhere in between lies reality. If there is sufficient information available to the manager he/she could be able to objectively predict when a certain incident could happen and estimate or define its impact. Then we have a Known Known, represented on the left side of the model. It is called a risk because the incident is definable, and the risk source and the effects are known. The manager has all the information needed and is confident he/she takes the right decision(s) to deal with it and proceeds with a course of action.

In reality, data and future conditions are hardly ever fully known. Especially in projects in the building industry. This is maybe why the known-known parabolic line is slightly bent and not straight. Even if there is an abundance of information available the context could easily change or there is still some hidden information, maybe unveiled later in the process. If we move more to the right side of the graph, less information is available and uncertainty grows. Unknowns start to come into play. More to the right, we have to deal – according to Winch – with uncertainties and not with risks. This is funny to me because we call what we do risk management and it is the title of the chapter. His explanation is that a possible incident is not fully definable and there is information is missing. Uncertainties can be partly defined or not at all because we do not know them fully.

It feels to me almost a semantic discussion and a bit like playing with words.

A manager will have to make decisions when solving situations. He/she makes sense of the information available and he/she will judge and decide based on it, even if not all information is available. Does he/she value the event as a risk or as uncertainty and will that influence his/her behavior? What if you are a risk seeker or more risk averse? That will influence your perception and the way you will act.

According to Winch, the cognitive model differs from other risk management approaches in two ways: first, it makes explicit what is often implicit. Dealing with risks or uncertainties is fundamentally a function of our perceptions. A risk is not something out there but dependant on the information available and the decisions made. One manager could perceive something as a risk while the other could see it as uncertainty to deal with. Second, the model makes visible the difference between, risk and uncertainty. It is a risk when probability and impact are definable. And Winch defines uncertainty if the probability of an incident and the impact cannot be defined or not completely defined.

Let us reason about the four distinctions he makes.

Known-Knowns. Is the cognitive condition of risk: the risk source is defined, and the probability is assigned. That means if the incident occurs in the future we are reasonably confident about the impact. You could assume that a manager will take all measures to avoid the thing to happen.

Known-Unknowns. Is the cognitive condition of uncertainty where the source can be defined but the probability or impact not. For instance the condition of the subsoil of a plot of land. We know that most subsoil in Amsterdam is contaminated but where the contamination is precisely or how bad it is, is often not known. A research will be needed to uncover the size and location of a possible pollution. Another example we know that a schedule is only a representation of the future and we know it will change. But what and when is unknown.

Unknown-Knowns. Is the cognitive condition of uncertainty when someone knows about a risk source but holds the information private and does not share it with the team, the client, or the manager. An example could be what we call strategic misrepresentation. We discussed information asymmetry in the first week of the course and the related tensions around the principal-agent problem.

Unknowns-unknowns (unk-unks). Is the cognitive condition of uncertainty where the risk source has not been identified and the risk event, therefore, cannot be known. This phenomenon is called a Black Swan.

It was remarkable to me that Winch states that known knowns are the area of most contention. Remarkable because I thought: if the risk is known then act! But because reality is often different, context changes, not all data is always available, and the decisions made are based on our personal perceptions. That means decisions are often (very) subjective and therefore subject to dispute. Overly optimistic project managers, therefore, think too much about risks and not about uncertainties, placing a risk event in the known-known sphere leads easily to making a wrong decision or acting the wrong way. Taking a step back and looking at the event from a different angle could change his/ her mind and value the event as an uncertainty.

Now I wonder even more why we do not call the whole thing uncertainty management. To me, the concept of risk management is confusing and has a too negative connotation.