The Cost of Uncertainty

All of us have to make hundreds of decisions every day. Most of those decisions are inconsequential to you but there are a few that are extremely important depending on your needs, believes and social context. These tough decisions demand most of your cognitive resources and most of the time these decisions come with a certain degree of uncertainty attached to them. For example, you might have to decide whether you want to go work for an up and coming company vs a more established incumbent. The younger company might be more exciting to you but its future might uncertain. Thus, you have to make a decision about whether to join it or not with limited information.

The point of this essay is to understand the trade-offs that you can make in order to lower uncertainty for a decision and explore whether these trade-offs are worth it or not. Now that we’ve established that, let’s analyze the levers that you can pull in order to decrease uncertainty. If we stick with the example mentioned before, you could ask the hiring manager at the startup more questions, you can wait to see whether the startup keeps growing not or you can come up with your own mental/financial model to explain why the startup will be successful or not. The underlying premise of these actions is the same. You will spend some time gathering information, which hopefully makes you more certain about the decision that you’re about to make.

Therefore, time is the best resource that you have to decrease uncertainty. Nevertheless, time is a scarce resource so you have to be smart about how you deploy it. You can decrease uncertainty but at a high cost, which is spending time to gather more information to ultimately decrease uncertainty. Having said so, sometimes spending time to decrease the uncertainty of a decision is not even a choice because a lot of decisions are time bound (i.e. they have a hard deadline before the opportunity disappear or there’s a negative consequence to not making a decision). In the example of deciding whether to join a startup or a more mature company if you wait too long to decide your offer letter might expire or the company might hire someone else.

So time is a resource that some times we can use to help decrease the uncertainty that comes with making certain decisions. So what? Well hypothetically knowing this relationship between time, uncertainty and decision-making can help us make better decisions. After thinking about a way to encapsulate this relationship, I came up with the following heuristic:

If delaying this decision by [INSERT TIME FRAME]  increases my likelihood of success to [X %], then I will delay this decision. Otherwise, I will make the decision right now.

Now this conditional statement has a couple of assumptions baked in. For example, the conditional statement takes into account the individual’s level of certainty of a positive outcome. This is not the same as the actual likelihood of success. Nevertheless, the latter doesn’t matter because when we make decision we rarely know our actual likelihood of success.

Furthermore, this decision assumes that the individual can accurately calculate the direct relationship between time and likelihood of success. For example, I know that having extra two weeks to make a decision can help me eliminate enough doubts to be sure that I have a 50% chance of success. If I thought that there’s a directly proportional relationship between time and likelihood of success, then four extra weeks will help me make a decision that has 100% chance of success. If it isn’t obvious by now, this is probably not how things work. I am very dubious that there’s a linear relationship between two factors for every possible type of decision.

Having said all of this, I still think that this conditional statement can be a useful tool to gage our confidence on the decisions that we are about to make. Furthermore, I think that it can help us manage risk in a way that is not necessarily intuitive (at least to me).

This is a convoluted piece and my thoughts might not be super clear so feel free to reach out if you have any questions.