How to deal with the era of uncertainty?

Nov 04-2024   

*This article is based on the keynote speech of Professor Huang Zhuo, Deputy Dean of PKU NSD, Dean of BiMBA Business School at PKU NSD.

Nowadays, "uncertainty" has become a prominent feature of the era. Uncertainty reflects a shift in the economic growth model, characterised by slowing economic growth rates and a number of significant challenges, such as real estate, ageing population and local government debt. Practitioners in a range of industries are experiencing the effects of policy uncertainty.

Characteristics and impact of uncertainty

There are four main sources of uncertainty: The first is the objective randomness of the world itself, i.e. there are many unknown factors in the physical world and the outcomes are uncertain. The second is uncertainty caused by information asymmetry. The third factor is the decision maker's subjective perception of external uncertainty. The fourth factor is the limited rationality and cognitive ability of humans, which means that we are limited by our own knowledge and information when making decisions.

The impact of uncertainty factors on our decisions and behaviour is influenced by three main mechanisms: real options theory, precautionary saving and the exacerbation of financial market frictions. In the context of uncertainty in the external environment, the role of government is crucial. A stable and predictable institutional environment and regulatory policy provide entrepreneurs with the certainty they need to build confidence.

Dealing with Uncertainty with Entrepreneurial Spirit

How can entrepreneurs and individuals effectively manage the increasing uncertainty in the external environment? Professor Huang Zhuo identified two key dimensions: firstly, enhancing risk awareness and response capabilities, and improving the ability to resist uncertainty through diversified investment strategies, establishing emergency reserves and so on. Secondly, actively adapting to changes, maintaining flexibility, and constantly adjusting and optimizing one's own strategies to better adapt to changes in the external environment.

Dealing with uncertainty through digitization

Another strategy for coping with uncertainty is to use digital technology. Professor Huang Zhuo outlined three key benefits of digitalization in managing uncertainty: enhanced information, flexibility and resilience, and innovation.

Firstly, Professor Shannon, the founder of information theory, once stated that “Information is that which reduces uncertainty”, which means having access to more information will enable us to cope more effectively with uncertainty. Secondly, digital technology provides us with higher flexibility and resilience through new technologies and business models. By leveraging digital tools, businesses can more efficiently adjust strategies, optimize processes, and rapidly adapt to market shifts, ensuring their continued competitiveness in uncertain environments. Finally, digitalization has given rise to many new business models and organizational forms, which not only enhance the competitiveness of enterprises, but also provide strong support for them to cope with uncertainty.

In summary, by enhancing flexibility, reducing costs, strengthening resilience, and promoting innovation, digital technology provides us with effective means to better respond to the changes in the external environment and cope with uncertainty.