Applying Tactics for Managing Uncertainty and Risk

The more I read and think about the topic of risk, the more I see how steeped it is in everything we do.

Whether you are an investor, a product manager, a CEO, or anyone dealing with uncertainty, the effectiveness of the tactics you use for managing risk will likely define your success in your role.

Nassim Taleb, my favorite thinker and author on this topic, has said that the single question that drives his work is how to handle uncertainty and risk. What do you do when you don’t know what’s going on?

We don’t understand random events, we can’t predict what’s going to happen. But you can tell how the random event will impact you. You know whether you are going to make from it, lose from it, make a lot, lose a lot. Try to position yourself to benefit more than you would lose from a random event (or to lose less than your neighbor). This is the idea of asymmetry. If in general you make more from a random event than you lose from it, you will do very well in the long run.

Nassim Taleb on Symmetry and Asymmetry

A common tactic for investors to mitigate risk is to define your risk. At what exact point will I acknowledge that I am wrong, and therefore get out of the trade.

Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in.

Bruce Kovner in Market Wizards

The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you’re wrong. You’ve got to recognize when you may be wrong and sell without hesitation to cut short every one of your losses.

How to Make Money in Stocks by William J. O’Neil

You’ll never have all the information. And you may miss out on your opportunity if you spend too much time trying to collect it. You can define your risk, set guardrails, and be quick to recognize when it’s not working and course correct.

Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.

Jeff Bezos in Working Backwards