Seven Rules for Risk and Uncertainty

Curtis Faith

Saving the planet will not be easy. We know what the most urgent problems are, but there is too much uncertainty to predict any particular outcomes or events with precision.

So what are we to do? How do we formulate strategy and plans to avert or mitigate disasters? How do we plan for problems when we don’t know exactly what form they will take?

Seven rules

As I noted in my previous blog post, from my experience as a trader, an entrepreneur, and what what I learned about how emergency room (ER) doctors manage risk and uncertainty, those who are confronted with uncertainty as part of their daily lives use a similar strategy for managing that uncertainty. Further, the way they make decisions and develop plans for the future is very relevant to the Azimuth project.

My second book, Inside the Mind of the Turtles, described this strategy in detail. In the book, I outlined seven rules for managing risk and uncertainty. They are:

• Overcome fear,
• Remain flexible,
• Take reasoned risks,
• Prepare to be wrong,
• Actively seek reality,
• Respond quickly to change, and
• Focus on decisions, not outcomes.

Most of you are familiar with many of the aspects of life-or-death emergencies, having experienced them when you or a loved one has been seriously sick or injured. So it may be a little easier to understand these rules if you examine them from the perspective of an ER doctor.

Overcome fear

Risk is everywhere in the ER. You can’t avoid it. Do nothing, and the patient may die. Do the wrong thing, and the patient may die. Do the right thing, and the patient still may die. You can’t avoid risk.

At times, there may be so many patients requiring assistance that it becomes impossible to give them all care. Yet decisions must be made. The time element is critical to emergency care, and this greatly increases the risk associated with delay or making the wrong decisions. The doctor must make decisions quickly when the ER is busy, and these decisions are extremely important. Unlike in trading or in a startup, in the ER, mistakes can kill someone.

To be a successful as an ER doctor, you must be able to handle life-or-death decisions every day. You must have the confidence in your own abilities and your own judgment to act quickly when there is very little time. No doctor who is afraid to make life-or-death decisions stays in ER for very long.

Remain flexible

One of the hallmarks of an ER facility is the ability to act very quickly to address virtually any type of critical medical need. A well-equipped ER will have diagnostic and surgical facilities onsite, defibrillators for heart attack victims, and even surgical tools for those times when a patient may not survive the trip up the elevator to a full surgical suite.

Another way that an ER facility organizes for flexibility is by making sure that there are sufficient doctors with a broad range of specialties available. ERs don’t staff for the average workload; they staff for the maximum expected workload. They keep a strategic reserve of doctors and nurses available to assist in case things get extremely busy.

Take reasoned risks

Triage is one way of managing the risks associated with the uncertainty of medical diagnoses and treatments. Triage is a way of sorting patients so those who require immediate assistance are helped first, those in potentially critical situations next, and those in no imminent danger of further damage are helped last. For example, if you go to the ER with a broken leg, you may or may not be the first person in line for treatment. If a shooting victim comes in, you will be shuffled back in line. Your injury, while serious, can wait because you are in little danger of dying, and a few hours’ delay in setting a bone is unlikely to cause permanent damage.

Diagnosis itself is one of the most important aspects of emergency treatment. The wrong diagnosis can kill a patient. The right diagnosis can save a life. Yet diagnosis is messy. There are no right answers, only probable answers.

Doctors weigh the probability of particular diseases or injuries against the seriousness of outcomes for the likely conditions and the time sensitivity of a given treatment. Some problems require immediate care, whereas some are less urgent. Good doctors can quickly evaluate the symptoms and results of diagnostic tests to deliver the best diagnosis. The diagnosis may be wrong, but a good doctor will evaluate the factors to determine the most likely one and will continue to run tests to eliminate rarer but potentially more serious problems in time to effect relevant treatment.

Prepare to be wrong

A preliminary diagnosis may be wrong; the onset of more serious symptoms may indicate that a problem is more urgent than anticipated initially. Doctors know this. This is why they and their staff continuously monitor the health status of their patients.

Often while the initial diagnosis is being treated doctors will order additional tests to verify the correctness of that initial diagnosis. They know they can be wrong in their assessment. So they allow for this by checking for alternatives even while treating for the current diagnosis.

More than perhaps any other experts in uncertainty, doctors understand the ways that uncertainty can manifest itself. As a profession, doctors have almost completely mapped the current thinking in medicine into a large tree of objective and even subjective tests that can be run to confirm or eliminate a particular diagnosis. So a doctor knows exactly how to tell if she is wrong and what to do in that event almost every time she makes a diagnosis. Doctors also know which other, less common medical problems also can exhibit the same symptoms that the previous diagnosis did.

For example, if a patient comes in with a medium-grade fever, a doctor normally will check the ears, nose, sinuses, lymph nodes, and breathing to eliminate organ-specific issues and then probably issue a diagnosis of a flu infection. If the fever rises above 102 degrees (39C), the doctor probably will start running some tests to eliminate more serious problems, such as a bacterial infection or viral meningitis.

Actively seek reality

Since doctors are not 100 percent certain that the diagnosis they have made for a given patient is correct, they continue to monitor that patient’s health. If the patient is in serious danger, he will be monitored continuously. Anyone who visits a hospital emergency room will notice all the various monitors and diagnostic machines. There are ECG monitors to check the general health of the heart, pulse monitors, blood oxygenation testers, etc. The ER staff always has up-to-the-second status for their patients. These immediate readings alert doctors and nurses quickly to changes indicating a worsening condition.

Once the monitors have been set up (generally by the nursing staff), ER doctors double-check their diagnosis by running tests to rule out more serious illnesses or injuries that may be less common. The more serious the patient’s condition, the more tests will be run. A small error in diagnosis may cost a patient’s life if she suffers from a serious condition with poor vital signs such as very low blood pressure or an erratic pulse. A large error in diagnosis may not matter for a patient who is relatively healthy. So more time and effort are spent to verify the diagnoses of patients with more serious conditions, and less time and effort are spent verifying the diagnoses of stable patients.

Actively seeking reality is extremely important in emergency medicine because initial diagnoses are likely to be in error to some degree a significant percentage of the time. Since misdiagnoses can kill people, much time and effort are spent to verify and check a diagnosis and to make sure that a patient does not regress.

Respond quickly to change

If caught early, a misdiagnosis or a significant change in a patient’s condition need not be cause for worry. If caught late, it can mean serious complications, extended hospitalization, or even death. For critical illness and injury, time is very important.

The entire point of closely monitoring a patient is to enable the doctor to quickly determine if there is something more serious wrong than was first evident. A doctor’s initial diagnosis comes from the symptoms that are readily apparent. A good doctor knows that there may be a more serious condition causing those symptoms. More serious conditions often warrant different treatment. Sometimes a patient’s condition is serious enough that a few hours can mean the difference between life and death or between full recovery and permanent brain damage.

For example, a mother comes into the ER with her preteen son, who is running a fever of 102 degrees (39C), has a headache, and is vomiting. These are most likely symptoms from a flu infection that is not particularly emergent. The treatment for the flu is normally just bed rest and drinking lots of fluids. So, if the ER is busy, the flu patient normally will wait as patients with more urgent problems get care.

The addition of one more symptom may change the treatment completely. If the patient who may have been sitting in the ER waiting room starts complaining of a stiff painful neck in addition to the flu symptoms, this may be indicative of spinal meningitis, which is a life-threatening disease if not treated quickly. The attending physician likely will order an immediate lumbar puncture (also called a spinal tap) to examine the spinal fluid to see if it is infected with the organisms that cause spinal meningitis. If it is a bacterial infection, treatment with antibiotics will begin right away. A few hours difference can save a life in the case of bacterial spinal meningitis.

The important thing to remember is that a good doctor knows what to look for that will indicate a more serious condition than was indicated initially. She also will respond very quickly to administer appropriate treatment when the symptoms or tests indicate a more serious condition. A good doctor is not afraid of being wrong. A good doctor is looking for any sign that she might have been wrong so that she can help the patient who has a more serious disease in time to treat it so the patient can recover completely.

Focus on decisions, not outcomes

One of the difficulties facing ER doctors because of the uncertainty of medical diagnoses and treatments is the fact that a doctor can do everything correctly, and the patient still may die or suffer permanent damage. The doctor might perform perfectly and still lose the patient.

At times, a patient may require risky surgery to save his life. The doctor will weigh the risk of the surgery itself against the risk of alternative treatments. If the surgery will increase the chances of the patient surviving, then the doctor will order the surgery or perform it herself in cases of extreme emergency.

A doctor may make the best decision under the circumstances using the very best information available, and still the patient may die. A good doctor will evaluate the decision not on the basis of how it turns out but according to the relative probabilities of the outcomes themselves. An outcome of a dead patient does not mean that surgery was a mistake. Likewise, it may be that the surgery should not have been performed even when it has a successful outcome.

If ER doctors evaluated their decisions on the basis of outcomes, then it would lead to bad medicine. For example, if a particular surgery has a 10 percent mortality rate, meaning that 10 percent of the patients who have the surgery die soon after, this is risky surgery. If a patient has an injury that will kill the patient 60 percent of the time without that surgery, then the correct action is to have the surgery performed because the patient will be six times more likely to live with it than without it. If an ER doctor orders the surgery and it is performed without error, the patient still may die. This does not change the fact that absent any new information, the decision to have the surgery still was correct.

The inherent uncertainty of diagnosis and treatment means that many times the right treatment will have a bad outcome. A good doctor knows this and will continue prescribing the best possible treatment even when a few rare examples cross her path.

Relevance for Azimuth

Like an ER doctor trying to diagnose a patient in critical condition, we don’t have much time. We need to prepare ourselves so that when problems arise and disaster strikes, we can quickly determine what’s wrong, stabilize the patient, make sure we have found all the problems, monitor progress, and maintain vigilance until the patient has recovered.

The sheer complexity of the issues, and the scope of the problems that endanger the planet and life on it, ensure that there will never be enough information to make a “correct” analysis, or one single foolproof plan of action. Except in the very broadest terms, we can’t know what the future will bring so we need to build plans that acknowledge that very real limitation.

Rather than pretend that we know more than is possible to know we should embrace the uncertainty. We need to build flexible organizations and structures so that we are prepared to act no matter what happens. We need to build flexible plans that can accommodate change.

We need to build the capability to acquire and assimilate an understanding of reality as it unfolds. We need to seek the truth about our condition and likely prospects for the future.

And we need to be willing to change our minds when circumstances indicate that our judgments have been wrong.

Being ready for any potential scenario will not be easy. It will require a tremendous effort on the part of a global network of scientists, engineers, and others who are interested in saving the planet.

I hope that you consider joining our effort.

Curtis Faith on the Azimuth Project

Hi, I’m Curtis Faith. I’m very excited to be helping with the Azimuth Project.

A few weeks ago, I read John’s exhortation for blog readers to join in the discussion on the Azimuth Forum, so I decided to check it out. I was surprised at the amount of work that has been done in the last six months. I was inspired by the project’s goals and decided to commit to helping.

Since we need help, and hope that other blog readers might pitch in to help too, John and I thought it would be a good idea for me to explain a little about myself, why I think the Azimuth Project is so important, and how I think I can help.

I just turned 47 on Sunday. I am a first-time father with a 9-month old daughter. She is amazing. I don’t want her to grow up and wonder why our generation let things get so bad and I didn’t do anything to help make the world better.

I’m a real optimist by nature. But ignoring the very clear trends of the last 30 to 40 years is no longer an option. Our generation must stand up and do something about this.

A few years back I thought that politics might be the answer. I spent a lot of time learning the ins and outs of politics. My wife and I even followed the 2008 U.S. election and filmed the campaigns of Obama and Ron Paul in the process of learning. It is clear to me—having seen the way the last few years have unfolded—that political solutions will not avert the coming crisis.

In the last few years, my wife and I have lived in southeast Asia for 4 months, and in South America for a few years. I wanted to get to understand the world from outside the U.S. perspective. To get to know people in other countries as individuals, as humans. This has made it even more clear what the major problems are, and that the solutions won’t be implemented until a major crisis strikes.

So I’ve been working on learning relevant technology and science for the last few years as a backup plan. Trying to see where I might be able to help out in the most effective way possible. I have also spent a lot of time investigating the various other efforts working on the major global problems. None of them appear to me to be facing reality. In contrast, the Azimuth Project fits what I’ve seen with my own eyes.

But most of all, the reason that I’m excited about the Azimuth Project is that it has the loftiest of goals and the Earth needs saving. We’ve screwed it up and we’re running out of time.

A bit about me

I’m best known for something that started 27 years ago, in the fall of 1983, when I was just 19 years old.

I dropped out of college because I was bored and joined a small group of traders who later became famous in the trading world because of our subsequent success and how we learned to trade. Some of the lessons I learned in that group about managing risk and uncertainty are very relevant to the Azimuth Project goals for saving the world.

A famous Chicago trader, Richard Dennis, took out large ads in the New York Times, Barrons, and the Wall Street Journal announcing trainee positions. After only two weeks of training we were given money to trade and at the end of the first month of practice with a small account, I was given a $2 million account to trade. Over the next 4 plus years, I turned that $2 million into more than $33 million, more than doubling the money each year. Most of the other trainees were also successful and this story became legend in trading circles as the group made more than $100 million for Richard during the life of the program. Our group was known as the Turtles and I wrote a book about this experience, Way of the Turtle, that became a bestseller in finance a few years back.

After Rich disbanded the Turtles, I got bored with trading. I was more interested in software and wanted to do something to make the world a better place. I started a few companies, built innovative software, tried to solve challenging problems and eventually found my way to Silicon Valley at the latter half of the Internet Boom.

Chaos, and risk and uncertainty

The sheer complexity of the issues and the scope of the problems that endanger the planet and life on it ensure that there will never be enough information to make a “correct” analysis. Except in the very broadest terms, we can’t know what the future will bring so we need to build plans that acknowledge that very real limitation.

We could pretend that we know more than is possible to know, or we can embrace the uncertainty and adapt to it. If we do this, we can concentrate on building flexibility and responsiveness along with an ability to assimilate and acquire an understanding of reality as it unfolds.

As a trader and entrepreneur, I learned about managing risk and uncertainty and how to develop flexible plans that will work when you can’t predict the future. Over time I came to see that other professionals who were forced to plan and make decisions under conditions of uncertainty used similar strategies.

But first, some background. While in Silicon Valley, I met a couple of guys who were forming a new hedge fund in the Virgin Islands, Simon Olsen and Bruce Tizes. In early 2001, it was obvious to most people that the Internet party was over in Silicon Valley. Pink slips were flying everywhere. So I thought it might be a good time to do something new for a few years.

I had often thought about getting back into trading so I could build up enough money to fund my own projects. I didn’t like the way that all the funding in software was focused on money. Most investors didn’t care about building cool software, and certainly not about doing positive things for the world. If those things came, they were secondary to profits. So for a while I thought it best to go make my own money. So I wouldn’t be restricted to only those strategies which optimized profits for investors.

So I decided to join Bruce and Simon in their hedge fund venture, and Bruce and I subsequently became good friends. Bruce had a very interesting background. He is one of the rare true polymaths that I’ve run into. He is incredibly bright, with a very flexible mind. He graduated high school at 15 years of age, college at 16, and medical school at 20. He later made a lot of money investing in real estate and trading stocks.

For most of the time since he had become a doctor, Bruce had been practicing emergency medicine at Mount Sinai Hospital in Chicago. Mount Sinai is the inspiration for the television series E.R. that also takes place in Chicago and is a major destination for accident and gunshot victims in the downtown Chicago area.

So in various discussions over lunch or dinner over the few years we worked together, I came to learn a bit about the life of an emergency room doctor. Over time, Bruce showed me that there were similarities in how ER doctors and traders approached risk and uncertainty.

From my experience with software entrepreneurs and venture capitalists, I knew that they too handle risks and uncertainty in similar ways. It seemed like everyone who was forced to deal with uncertainty in the normal course of business followed similar general principles, and that these principles would be very useful even for those who didn’t learn them on the job.

Since my first book sold very well, the publisher was interested in getting me to write another book. I agreed to write one. But this time I wanted to write a book about these important principles for managing risk and uncertainty rather than a trading book.

This became my second book, Inside the Mind of the Turtles. Unfortunately, against my wishes and better judgment, it was marketed as a trading book. The truth is that it is a much more general book written for times of chaos and uncertainty, even for the emergency room doctors for a planet in peril. It contains ideas that are very relevant to the Azimuth Project.

In my next post here, I’ll outline the Seven Rules for Risk I develop in the book and show how they are relevant for the Azimuth Project because of the tremendous uncertainty inherent in environmental and sustainability issues.

In the meantime, I urge you to join in and help with the Azimuth Project. Read some articles in the Azimuth Library and join the discussions on the related Azimuth Forum.

The Azimuth Project is multidisciplinary so there are opportunities for all different kinds of people to help out. For example, I have been interested in low-energy transportation alternatives. So I plan on doing more research, adding to the Azimuth library of articles for advanced transportation, and finding some of the best experts to see if they will help on the Azimuth Project itself. I am also good at simplifying and explaining complicated problems. So I plan to take some of the more complicated sustainability issues and summarize them for non-experts. This will make it easier for people of diverse talents to grasp the full scope of the problems Azimuth is tackling.

I’ve spent much of the last 10 years trying to figure out how I can best help make the world a better place.

For me, the Azimuth Project is that answer. Come check it out.