Uncertain about risk, or risking uncertainty?

We recently enjoyed reading David Pannell’s insightful exploration of risk versus uncertainty in agricultural decision-making. It inspired us to delve deeper into these concepts and their practical implications for enablers of change. In his blog post, and also in Abadi Ghadim et al. (2005), he helped shed light on the nuances of these terms and how they impact farming practices. Inspired by his discussion, in this episode we’re highlighting the differences between risk and uncertainty, and we’ll discuss their significance in the decision-making processes of farmers.

We often hear about risk and uncertainty in the context of farm management and agricultural practices. However, it’s important to distinguish between “risk” and “uncertainty” because they’re not the same and both are present in farming decisions. Risk is a concept related to the probabilities of various outcomes, even if we don’t know which specific outcome will occur. The example most often used is rolling dice or tossing a coin. We know the possible results and the likelihood of each one. So we know that if we roll two dice the outcome will be between 2 and 12, and if we keep rolling, we can predict the distribution of outcomes with high accuracy. So we don’t know the outcome but we do know the probabilities of the possible outcomes.

On the other hand, uncertainty refers to situations where we don’t know what the probabilities of outcomes are. For example, if a farmer decides to try a new forage variety, there’ll be information from research trials and their experience with growing other forages, but the farmers can’t really know how that forage variety will perform on their farm. This is uncertainty because we don’t know the distribution of the outcomes.  

Most farming decisions involve a mix of risk and uncertainty. Experience and data collected over time help reduce uncertainty, shifting the balance towards risk. Understanding this dynamic is helpful for farm advisors and extension practitioners working to support farmers in their decision-making processes. David Pannell makes the point that while some people suggest that uncertainty will prevent decisions, that’s rarely the case in farming. There’s always some information available to make an educated guess, even if the probabilities aren’t precisely known.

The primary difference between risk and uncertainty in decision-making lies in the source of the probability estimates. Under conditions of risk, probabilities are objective and well-defined. In contrast, uncertainty involves subjective judgments about outcomes. These judgments are more about the decision-maker’s confidence or feeling about the outcomes. But the decision-making process in farming doesn’t change whichever way the decision is made, whether with a systematic decision making process or intuitively. 

In their book “Decisive,” Chip and Dan Heath provide valuable insights into improving decision-making processes, which can be particularly beneficial for managing risk and uncertainty in farming. They identify four common biases that often derail good decision-making: narrow framing, confirmation bias, short-term emotion, and overconfidence. We’ve explored reducing our biases in a previous episode. To counter these biases, they propose the WRAP process:

1. Widen your options: Avoid narrow framing by considering more than just two options. This can help uncover more creative and suitable solutions.
2. Reality-test our assumptions: Validate ideas against real-world evidence through small experiments to test hypotheses in practice.
3. Attain distance before deciding: Overcome the influence of short-term emotions with strategies like the 10/10/10 test, which encourages us to consider how a decision will feel in 10 minutes, 10 months, and 10 years.
4. Prepare to be wrong: Accept that future predictions are uncertain and plan for different outcomes.

The Heath brothers also discuss using “base rates” which are statistical probabilities from similar past situations, to address uncertainty. This objective data helps make more informed judgments. Additionally, “tripwires” which are predefined triggers for re-evaluating decisions, can help manage uncertainty by setting limits and creating checkpoints.

For farm advisors and enablers of change, understanding risk and uncertainty can enhance how we help farmers in managing them. By supporting farmers to build experience and gather data, we can reduce uncertainty and equip them to make even more informed decisions.

We’ve shared our thoughts, and now we’d love to hear yours! How do you approach conversations about risk and uncertainty? Do you have any strategies or insights that have worked well? Drop a comment below and let’s keep the discussion going. After all, the best learning happens when we share ideas and experiences.

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Until next time—keep learning, keep sharing, and keep making a difference!

Resources

Abadi Ghadim, A. K., Pannell, D. J., & Burton, M. P. (2005). Risk, uncertainty, and learning in adoption of a crop innovation. Agricultural Economics, 33(1), 1-9. https://doi.org/10.1111/j.1574-0862.2005.00433.x

Heath, C., & Heath, D. (2013). Decisive: How to make better choices in life and work. Crown Business.

Pannell, D. (2024). Risk versus uncertainty. Pannell Discussions. https://www.pannelldiscussions.net/2024/06/421-selecting-the-numbers/