How to Manage the Biggest Risk of All: Uncertainty
These are uncertain times, but we’ve never lived with less risk. That may sound crazy coming out of a pandemic that disrupted our lives in uncountable ways — and now we may be on the brink of World War III. But there is a big difference between risk and uncertainty, and each requires different coping strategies. Risk can be managed with insurance or hedging; Uncertainty demands flexibility.
That's important to know when making big life decisions like buying a house, changing jobs, having a baby, retiring or even adjusting your portfolio.
Risk includes things we can measure and see coming, uncertainty arises from the things that take us by surprise. Society has become very adept at measuring and managing risk with the help of data and technology. We see this in the stock market, in the housing market, and even our culture where data can increase the odds we’ll enjoy a movie on Netflix or a song on Spotify. When it comes to things we can measure, much less is left to chance. And if we can’t eliminate risk we can insure against it: using stock options as insurance against a falling share price, for instance.
Since the 1970s we've had more ways than ever to manage or eliminate risk in markets, in the economy, and in many aspects of our daily lives. The payoff was rising markets, low inflation (until recently), and stable wages and jobs. So we're gobsmacked when we're hit by something we didn't expect — like pandemics and wars that send the world spinning.
For most of human history people lived with uncertainty and risks they couldn't manage. Violent wars and deadly disease outbreaks were a fact of life. This changed in the 20th century when the government took on more of our risk; Welfare programs eased hardship, countries cooperated through international organizations and more trade, and technology gave us more tools to insure against risk. In the 1970s the word risk became associated with something you could manage or avoid.
But the last two years may mark a new era. We can still manage risk and have better tools to so, but in the new world order it's about managing uncertainty — a much more difficult proposition. You can’t plan for the unforeseeable.