Risk Analysis and Uncertainty

🔄 Quick Recall: In the last lesson, you learned to detect cognitive biases and challenge your thinking with Devil’s Advocate and pre-mortem analysis. Now let’s tackle the uncertainty that makes decisions truly difficult.

The Uncertainty Problem

Most important decisions involve uncertainty — you don’t know what will happen. Will the new job work out? Will the investment grow or shrink? Will the market shift? You can’t eliminate uncertainty, but you can make it manageable.

Scenario Planning

Map multiple futures instead of betting on one:

Help me scenario-plan for this decision:

Decision: [what you're choosing]
Key uncertainties: [what you don't know — market conditions, competitor moves, personal factors]
Time horizon: [when will you know the outcome?]

Create three scenarios:

BEST CASE — What if everything goes right?
- What specific things would need to happen?
- How likely is this scenario? (%)
- What would the outcome be worth (financially, career-wise, personally)?

LIKELY CASE — What if things go as expected?
- What's the realistic middle ground?
- How likely is this scenario? (%)
- What would the outcome look like?

WORST CASE — What if things go wrong?
- What specific failures could occur?
- How likely is this scenario? (%)
- What would the damage be?
- Can I survive this outcome? What's my recovery plan?

Also identify: What's the BLACK SWAN scenario — an unlikely but extreme outcome I should at least be aware of?

✅ Quick Check: Why include a “black swan” scenario even though it’s unlikely?

Because black swans are low-probability but high-impact events that people systematically ignore. Nobody plans for them because “it won’t happen.” But when they do happen — a pandemic, a market crash, a key partner leaving — the lack of any preparation makes the damage catastrophic. You don’t need a detailed plan for black swans. You need awareness: “If X happened, I’d do Y.” That one sentence of preparation can be the difference between recovery and ruin.

Expected Value Analysis

Quantify your options when they involve risk:

Help me calculate the expected value of my options:

Option A: [describe]
- Outcome 1: [description] — probability: [X%] — value: [$Y or qualitative rating]
- Outcome 2: [description] — probability: [X%] — value: [$Y or qualitative rating]
- Outcome 3: [description] — probability: [X%] — value: [$Y or qualitative rating]

Option B: [describe]
- Outcome 1: [description] — probability: [X%] — value: [$Y or qualitative rating]
- Outcome 2: [description] — probability: [X%] — value: [$Y or qualitative rating]

Calculate:
1. Expected value for each option
2. The variance (how spread out are the possible outcomes?)
3. The downside risk (what's the worst I could lose?)
4. The upside potential (what's the best I could gain?)

Then consider: Given my risk tolerance (I can afford to lose [amount] but not more), which option is best for ME — not just mathematically optimal?

Risk Tolerance Assessment

Different people should make different choices for the same decision:

Help me understand my risk tolerance for this decision:

Decision: [what you're choosing]
What I could lose: [worst-case financial, career, personal impact]
What I could gain: [best-case financial, career, personal impact]
My current situation: [financial stability, career security, support system]

Help me assess:
1. Can I survive the worst case? (financially and emotionally)
2. How long would it take to recover from the worst case?
3. Would I regret NOT taking the risk more than taking it and failing?
4. What's my runway? (How long can I sustain risk before needing to change course?)
5. Is my risk tolerance right now being affected by emotion (fear or excitement)?

Based on my actual situation (not my feelings), am I in a position to take this risk?

The Information Sufficiency Test

Decide when to stop researching and start deciding:

I'm trying to decide [decision] and I've been researching for [time period].

Here's what I know so far:
[list your key findings]

Here's what I still don't know:
[list remaining uncertainties]

Help me determine if I have enough information:
1. Would knowing the remaining unknowns actually change my top choice?
2. What's the cost of continued research (time, missed opportunity, mental energy)?
3. What's the cost of deciding NOW with current information?
4. Am I researching to decide — or to delay deciding?
5. What's the minimum additional information that would be worth the wait?

Give me a clear recommendation: decide now, or gather [specific additional information] first.

✅ Quick Check: Why does the prompt ask “am I researching to decide — or to delay deciding?”

Because analysis paralysis disguises itself as thoroughness. When you’re afraid of making the wrong choice, more research feels productive — but it’s actually avoidance. The fifth comparison spreadsheet doesn’t help if the first four all pointed to the same answer. AI can identify this pattern: if your top option hasn’t changed after the last three rounds of research, you’re probably not researching — you’re stalling.

Exercise: Analyze Risk for Your Decision

Using your decision from Lesson 1:

Create three scenarios (best, likely, worst) using the scenario planning prompt
Calculate expected values for your top two options
Assess your personal risk tolerance — can you survive the worst case?
Run the information sufficiency test — do you have enough to decide?

Key Takeaways

Scenario planning (best, likely, worst, black swan) prepares you for multiple futures instead of betting on a single prediction
Expected value multiplies outcomes by probabilities — but your risk tolerance determines whether to follow the math or play it safe
Black swan scenarios don’t need detailed plans — just awareness and a one-sentence contingency saves you from catastrophic surprise
“Can I survive the worst case?” is the most important risk question — if yes, the decision becomes about optimization; if no, it’s about survival
Stop researching when additional information wouldn’t change your top choice — continued research past that point is avoidance, not analysis
Your current financial stability, career security, and support system determine your risk tolerance more than your feelings about risk

Up Next: In the next lesson, you’ll handle high-stakes decisions — the ones where the consequences of getting it wrong are severe and the pressure to get it right is intense.