Until the God speaks - Protean Uncertainty
There is a kind of confusion most of us inherit without noticing. We assume the future is hidden and that if we looked harder we would see it. We assume uncertainty is a fog and that good thinking, good data and good models will burn it off. We assume the world is something like a closed book we have not yet finished reading. I believe this is wrong.
Coin flip
Let's start with what uncertainty actually is. The simplest kind is the uncertainty of a coin you are about to flip. You don't know whether it will land heads or tails. But you know there are two outcomes and that they are equally likely. You also know that if you flip the coin a thousand times the long-run average will sit close to fifty percent. The structure is fixed. Only the outcome of this particular flip is unknown.
Most of what gets taught as risk management lives at this level. Probability distributions, expected values, confidence intervals. The mathematics is beautiful and it is genuinely useful. Insurance works because of it. So does most of finance and most of engineering. When the structure is stable and the events are repeatable, the tools are excellent.
Knightian uncertainty
The next level is harder. You don't know the probabilities. You don't know if the coin is fair. Heck, you don't even know if it is a coin. The economist Frank Knight called the first kind risk and the second kind uncertainty and he argued that real (economic) life is mostly the second (Knight, 1921) . You are starting a business. You are choosing a partner. You are deciding whether to leave your job. No frequency table or long run to look at. There is just this decision, made once, with consequences you cannot fully see.
Most of us, most of the time, mistake the second kind for the first. We act as if our uncertainties had distributions when they don't. We make plans that assume the structure is stable when it isn't. We treat life as a coin flip with known odds and are surprised when the coin turns out to be something else.
Deep, true, radical
In Knight's picture the structure is still there. You just don't know its parameters. Viewing the world as a black box and you are trying to guess what is inside. Lift the lid and you would see.
The third level is different. Here the structure itself is in motion. It shift and the state-space transforms. The thing you are trying to know responds to the act of knowing it. There is no lid to lift, because what you would see if you lifted it would already be different from what was there a moment ago, and different again from what will be there when you act on what you saw.
This is the kind of uncertainty that governs markets, organisations, technologies, relationships, careers, lives. Kay and King (2020) call it radical uncertainty. The RAND Corporation, the American policy think tank that pioneered systems analysis during the Cold War, calls it deep uncertainty (Lempert, Popper, & Bankes, 2003). Knight himself, later in his life, called it true uncertainty.
The descriptors stay diffuse. Deep, true, radical. Each names a quality and each misses the central thing, which is movement. So I want to introduce a different name, one that draws on an older lineage and foregrounds the actual character of the difficulty.
Proteus
In the Odyssey (Homer), Menelaos is stranded on the island of Pharos. To learn how to return home he must seize the sea-god Proteus and so the god yields his prophecy. But seizing Proteus is not an easy task, as he continues to slip away. First he becomes a lion. Then a serpent. Then a leopard, a boar, running water, a tree. Every new move Menelaos makes, Proteus uses to transforming into a new form. Proteus uses new information to get in new formation. Eventually Menelaos only succeeds by holding through every metamorphosis until the god, having exhausted all his shapes, finaly returns to himself and speaks his prophecy.
Most of the difficulty we have with uncertainty comes from being taught that the future is hidden and that with enough effort we could see it. We were taught risk is something you measure and uncertainty is something you reduce. So when we meet a world that continues to shift under our descriptions, that becomes something else exactly when we try to hold it, we feel that we have failed.
There is no model that solves protean uncertainty, because the uncertainty is not a problem of insufficient information. It is a property of the kind of world we are in. Markets are not stable systems with hidden parameters. They are systems whose parameters change in response to the strategies participants use to navigate them. Organisations are not fixed structures whose dynamics you can study from outside. Relationships are not closed books waiting to be read. The act of being in these systems alters what they are.
Local achievements of modeling
What Menelaos does on the island of Pharos is interesting. He cannot out-think Proteus. He cannot anticipate the next form. He can only hold through the lion, the serpent and the running water until the god has nothing left to become.
This is a different competence than the one we were trained for. School taught us to solve. Work taught us to forecast. The whole apparatus of modern decision-making is built on the assumption that the right amount of thought, applied early enough, will let us see around the next corner. In a protean world the road reshapes itself as you walk it.
What you can do instead is stay. Stay engaged with a situation that keeps changing under you. Stay invested in a relationship that keeps shifting. Stay in a career whose meaning will not be the same in ten years as it was when you started. The skill is not prediction. The skill is endurance in and through transformation.
Circling back to risk. The tools we have for calculating it are powerful. But we must not forget that reality is always uncertain. Risk and ambiguity are local achievements of modeling. We tend to imagine it the other way around. We imagine that the world is fundamentally measurable and that uncertainty is what is left over when measurement fails. What we call risk is what happens when, for a while, in a particular domain, the structure holds still long enough to be described.
So when a model produces clean probabilities, this is not the world revealing itself. It is a small region of the world, briefly, allowing itself to be approximated. The probabilities are real inside the model. The model is real inside its conditions. The conditions hold until they don't. Taleb calls this Platonicity, our preference for the clean, well-defined form over the rough thing it claims to represent.
Living well in a protean world means using risk models where they earn their keep and remembering, always, that they are local. The map is accurate over a small patch of ground. Step off the patch and the map is a piece of paper.
What the myth ends with
The myth ends with the prophecy. Proteus speaks. Menelaos gets him there by his willingness to hold on through the transformations, without letting go and without forcing the god into a form he has not yet given.
Uncertainty has a shape and the shape, once you can see it, is something you can hold. Not capture. Hold.
References
Homer. (1919). The Odyssey (A. T. Murray, Trans.). Harvard University Press. (Original work composed ca. 8th century BCE)
Kay, J., & King, M. (2020). Radical uncertainty: Decision-making beyond the numbers. W. W. Norton.
Knight, F. H. (1921). Risk, uncertainty and profit. Houghton Mifflin.
Lempert, R. J., Popper, S. W., & Bankes, S. C. (2003). Shaping the next one hundred years: New methods for quantitative, long-term policy analysis. RAND Corporation.