Install Theme

Posts tagged with ‘uncertainty’

If uncertainty is noise in a vibrant economy, it’s deafening in a subpar growth economy.

Diane Swonk

The human psyche can tolerate a great deal of prospective misery, but it cannot bear the thought that the future is beyond all power of anticipation.

Robert Heilbroner

Maturity of mind is capacity to endure uncertainty.

John Finley

The business community focuses on managing uncertainty. That’s actually a bit of a canard. In an increasingly turbulent and interconnected world, ambiguity is rising to unprecedented levels. That’s something our current systems can’t handle.

There’s a difference between the kind of problems that companies, institutions, and governments are able to solve and the ones that they need to solve. Most big organizations are good at solving clear but complicated problems. They’re absolutely horrible at solving ambiguous problems — when you don’t know what you don’t know. Faced with ambiguity, their gears grind to a halt.

Uncertainty is when you’ve defined the variable but don’t know its value. Like when you roll a die and you don’t know if it will be a 1, 2, 3, 4, 5, or 6. But ambiguity is when you’re not even sure what the variables are. You don’t know how many dice are even being rolled or how many sides they have or which dice actually count for anything. Businesses that focus on uncertainty actually delude themselves into thinking that they have a handle on things. Ah, ambiguity; it can be such a bitch.

Dev Patnaik, cited by Robert Safian in This Is Generation Flux: Meet The Pioneers Of The New (And Chaotic) Frontier Of Business

We are in the Postnormal now, where volatility, uncertainty, complexity, and ambiguity have reached unparalleled heights. We are constantly in a strategy fog, unable to see very far ahead, to plan, or even think about problems and solutions. We live in a time defined by dilemmas: unsolvable situations that can only be coped with, balanced against.

Like a martial artist who knows she may be attacked at any time, by any opponent, with any weapon, the most productive approach is to practice, speculatively, but remain fluid in mind, and unfocused on any specific techniques.

This is why I counsel speculative design as a discipline. Instead of trying to imagine a future world, instead imagine an imaginary appliance of that future world, and its use by the denizens of that future. Then consider the implications of those interactions. That is the equivalent of a karate-do doing kata: we are sparring with the implications of our speculations.

We are in the capitalist’s dilemma today. Investors continue applying doctrines that were appropriate when capital was scarce. But because today capital is abundant and the cost of capital today is essentially zero, the same rules are the wrong rules. It’s as if our leaders in Washington are standing on a beach holding fire hoses full open, pouring more capital into an ocean of capital.

Clayton Christensen writing on why pouring more money into banks won’t jumpstart the economy. Money has become a commodity, and investors have lots of it, but no safe (‘relatively safe from uncertainty’) investments.

We have uncertain tax policies, uncertain political alignments, uncertain geopolitics: so everyone is waiting on the sidelines as the temperature rises, droughts continue and the water wars start, food prices rise and the poor begin to go hungry, and the liberal/conservative face-off yields no answers.

The postnormal is an era defined by dilemmas to face and straddle, not problems to be solved. Our analytic approaches — that worked reasonably well in the postmodern industrial era and earlier — bring little insight here, if any.

And the majority of the elites and nearly all of the average citizens think we are still in the past era, expecting a conventional roller coaster ride through boom-and-bust, wondering ‘when will things get back to normal?’. But we have moved past that, into a time where we can’t get back to normal. The only way out is ahead, into a postnormal frame of reference, postnormal responses, and a postnormal realignment of the challenges and resources we share, and new perspectives on how to get clear of the trappings and entanglements of the past.

(Source: CNN)

Venture Capital Becomes Even More Uncertain An Investment

Venture capital firms are closing, decreasing the size of funds, or dropping partners, as a result of a worsening marketplace for start-ups to get to liquidity. As a result, the VC firms are finding it harder to raise money to invest:

Pui-Wing Tam,  Venture Firms Take a New Tack

U.S. venture-capital funds garnered $20.3 billion in 2012, essentially flat from 2011 and down from $39 billion in 2007, according to Dow Jones LP Source.

Overall, there were 842 venture-capital firms in the U.S. in 2011 that raised money in the previous eight years, down 16% from 1,004 in 2007, according to the National Venture Capital Association.

[…]

More venture firms “realize that in order to be successful and deliver returns, they need to be focused on smaller groups of people and smaller sets of companies,” said David Hornik, a venture capitalist at August Capital, which in October closed a $300 million fund, compared with $350 million for its previous fund. Six partners are investing out of the new fund, down from seven for the prior fund, he added.

Many venture firms are responding to a higher bar from investors, who have been disenchanted with scant venture returns and are scrutinizing partnerships closely to pick out the stronger versus weaker venture capitalists in a firm.

Investors “have become more selective because their return requirements are higher.” said Tom Gladden, a partner at investment management firm Adams Street Partners, which invests in venture funds. “We’re going to evaluate the [venture firm’s] team to the point of looking at the personal franchises of individual partners.”

What is unsaid in this story is that investors the world over are finding it harder to determine where to invest. Uncertainty and ambiguity make it difficult to pick sectors or investment vehicles — like start-ups — with anything like a dependable return. 

The Biggest If Of All, Part II

Scott Rafer riffs on my recent post, The Biggest If Of All, where I suggest that this time it might be different, this time we may have moved into a new era, a new economy: the postnormal. Rafer says it’s just the same old same old:

@stoweboyd This purely academic question gets asked every business cycle. It was being asked on the upside in the late 90s if you recall. In this (not very) regulated financial environment, investment managers figure out how to play new conditions which makes the answer to your question “No” +/- 20%. 

Well, logically, just because someone said X would happen 15 years ago and it didn’t doesn’t mean that someone saying X now is wrong. Those are independent events, at least in principle.

My point is something else entirely. We are living in a time where uncertainty is so great that businesses and investors are finding it increasingly impossible to make judgments about where things are headed. Andrew Ross Sorkin recently wrote about this:

The Election Won’t Solve All Puzzles - Andrew Ross Sorkin via NYTimes.com

“Uncertainty” has become the watchword over the last several years for many chief executives, politicians and economists as an explanation — or perhaps an excuse — for the economy’s slow growth, for the lack of hiring by business and for the volatility in the stock market.

“The claim is that businesses and households are uncertain about future taxes, spending levels, regulations, health care reform and interest rates. In turn, this uncertainty leads them to postpone spending on investment and consumption goods and to slow hiring, impeding the recovery,” a group of professors from Stanford University and the University of Chicago wrote in a study that found “current levels of economic policy uncertainty are at extremely elevated levels compared to recent history.” (The professors have created a Web site, policyuncertainty.com, where you can track the “uncertainty” levels.)

image

If you go look at the other charts — like the European Policy Uncertainty Index — economic uncertainty has been steadily rising since 2007.

We are moving from a world of problems, which demand speed, analysis, and elimination of uncertainty to solve, to a world of dilemmas, which demand patience, sense-making, and an engagement of uncertainty. - Denise CaronSo my point is different. Investors and other business people will find it harder to reason about possible futures because we have moved onto shifting ground. It’s a VUCA world, characterized as increased volatility, uncertainty, complexity, and ambiguity.

As I wrote in July, regarding our blindness regarding the postnormal climate we’ve made for ourselves,

The biggest problem is that people’s thinking patterns are stuck in the old days, and I don’t just mean their expectations about ‘normal’ weather. No, even worse is that people can’t accept the reality that in the post-normal we will never have the luxury of time to assess and then adapt. Linear problem-solving approaches will simply not work anymore.

But this is not a call for more old world leadership, characterized by moving fast, and looking for permanent ‘solutions’ to well-defined and researched ‘problems’. Instead, we need leaders demonstrating the ‘VUCA Prime’ characteristics, as Bob Johansen has styled it.

image

Denise Caron makes the break between the old world and the new one very clear:

We are moving from a world of problems, which demand speed, analysis, and elimination of uncertainty to solve, to a world of dilemmas, which demand patience, sense-making, and an engagement of uncertainty.

So, in this context, there is no ‘solution’ to infrastructure stress and failure based on more violent weather. We are stuck in a problem space which is fundamentally unsolvable, but we have to try to make sense of this in the context of the larger world.

For example: the financial constraints of our weakened economy mean that we may not be able to repair the interstate highway system, but we might extend and maintain the train system for people moving. Do we have the foresight to disinvest in the highway system? Can we shift from a truck-based logistics system to boats, trains, and airships for long-distance hauling?

image

We are just as trapped in our thinking as we are in a rapidly changing global weather system, and without leaders with the mindset and skillset geared for the post-normal world, we will never find our way out.

The analysis about weather is paralleled by our inability to logically untangle the financial mess the world is in. And it’s not that we need to get smarter, do more analysis, put more brilliant minds on it: the system is so large, interconnected, and complex that it cannot be understood. It is a complex non-linear system, barreling along as fast as we can fuel it, and it cannot be neatly reduced to a set of smaller, more easily understood parts, unless we actually start disconnecting the parts.

But are we taking steps to disconnect the world’s financial markets? To raise trade barriers, and diminish global supply chains? To require companies to only do business in one country, and to only compete in a single marketplace? To break up vertically integrated multinationals? No. And leaving aside whether this would be a ‘good’ thing in some moral or ideological sense, we aren’t doing it. If anything, the world is growing more interconnected and complex. 

At the macroeconomic level, this poses astonishing policy issues, the first of which is seeing the forest for the trees: that we’ve moved into new territory and we have no map. At the microeconomic level, the investor or business leader has a set of tools that used to work, a map that used to show the way, a compass that found north. But they don’t work anymore. They no longer point the way, or suggest that all ways forward are equally uncertain of success.

Specifically with regard to investments in tech, David Lee at SV Angel recently said ‘It has never been easier to start a company, and never harder to build one’, regarding the structural issues in the tech funding world. VC’s don’t see a clear path for a real return on investments in commerce 2.0, games, or apps that rely on Facebook, Twitter, or other platforms. And the result of that uncertainty is being reflected in a decreased amount of later stage investments. This is an echo of the international fund managers I wrote about in the first installment of The Biggest If Of All, many of whom state that uncertainty has never been greater, or of more import in the investment world. So they, like tech VC’s, are holding back, and waiting for a return to normalcy.

But what if it never comes?

We know that the changes we’ve already made to our ecological world will take at least hundreds of years to reverse. Perhaps we’ve turned a similar curve in the economic and policy world. And we don’t know what the world will look like in a hundred years or so, and perhaps there is simply no way to figure out what is going to happen in the next five years, either.

In many ways, algorithms remain outside our grasp, and they are designed to be. This is not to say that we should not aspire to illuminate their workings and impact. We should. But we may also need to prepare ourselves for more and more encounters with the unexpected and ineffable associations they will sometimes draw for us, the fundamental uncertainty about who we are speaking to or hearing, and the palpable but opaque undercurrents that move quietly beneath knowledge when it is managed by algorithms.

Honor Harger quotes from Tarleton Gillespie essay The Relevance of Algorithms.

An accommodation with and accounting for “fundamental uncertainty” is one of the core qualities of the new literacy.

(via new-aesthetic)

(via gordonr)

Uncertainty Increasing, Which Is Postnormal

More indications that we are in a new economic era — the Postnormal — and not just a temporary period of contraction following yet-another-boom-bust-cycle. Uncertainty in on the rise in the business sector, and this is not just a ruse to coax employees to vote against their interests or be fired.

The Election Won’t Solve All Puzzles - Andrew Ross Sorkin via NYTimes.com

“Uncertainty” has become the watchword over the last several years for many chief executives, politicians and economists as an explanation — or perhaps an excuse — for the economy’s slow growth, for the lack of hiring by business and for the volatility in the stock market.

“The claim is that businesses and households are uncertain about future taxes, spending levels, regulations, health care reform and interest rates. In turn, this uncertainty leads them to postpone spending on investment and consumption goods and to slow hiring, impeding the recovery,” a group of professors from Stanford University and the University of Chicago wrote in a study that found “current levels of economic policy uncertainty are at extremely elevated levels compared to recent history.” (The professors have created a Web site, policyuncertainty.com, where you can track the “uncertainty” levels.)

image

The possibility of significant changes in the tax code? The fiscal cliff? The European debt crisis? The debt overhang and economic contraction in China? 

It’s all uncertain.

Effective leadership in the Postnormal will require greater tolerance of uncertainty, and a growing awareness that we are confronted with dilemmas that may have no ‘solutions’ only strategies for coping. 

Uncertainty Is Certain

Christina Romer is dead on when she points out that tax policies of the US Government are not causing businesses and consumers uncertainty about the economy, it’s the economy itself that is causing it.

Christina Romer, Uncertainty Over Bush Tax Cuts Is Not Hindering Recovery

One sign of heightened macroeconomic uncertainty is that the forecasts of respected analysts are all over the map. According to the Survey of Professional Forecasters conducted by the Federal Reserve Bank of Philadelphia, the difference between the highest and the lowest forecasts of unemployment a year from now is about twice as large as it was before the crisis. And forecasters’ reported uncertainty about their longer-run forecasts has shown no sign of improving over the last year. If professional forecasters are unsure of the future, businesses and consumers certainly are as well.

Such uncertainty about future economic conditions can make people hold off on any spending that is difficult to undo. Companies may hesitate to build factories or hire permanent employees until they have a better sense of whether the markets for their products will be strong or weak. Consumers may not buy new cars or build additions to their homes until they are more certain about future employment.

In a paper I wrote many years ago, I found that such macroeconomic uncertainty helped start the Great Depression. The stock market crash in October 1929 didn’t destroy a particularly large amount of wealth or make people highly pessimistic. Rather, it made companies and consumers very unsure about future income, and so led them to stop spending as they waited for more information.

How do we resolve uncertainty about future growth? The Federal Reserve, Congress and the president need to reaffirm that they will do whatever it takes to restore the economy to full health. They could take a lesson from President Franklin D. Roosevelt, who declared in his 1933 inaugural address that he would treat the task of putting people back to work “as we would treat the emergency of a war.”

They should follow up with powerful fiscal and monetary actions to create jobs — coupled with a concrete plan for tackling our long-run budget problems. We are at a critical moment. With many in Congress opposed to further jobs measures and tax increases of any kind, the chances of prolonged gridlock are high.

But such policy paralysis would be a disaster. It would make uncertainty more acute by leaving us to the unpredictable forces of natural recovery and with no prospect of resolving our unsustainable deficits. Aggressive action to restore growth and face up to our long-run challenges is the only true and lasting solution.

Hmmm. I agree we should boost jobs, and more stimulus is needed. The problem is we lack a vision of what the new normal is going to be for America and the world. We aren’t going to get back to 1995, or the earlier post-war boom.

We are moving quickly into a very different world, and so the notion of ‘restoring’ what we had should be dropped. We have to start actively building what we need for 2020, now.

(via underpaidgenius)