Uncertain about Risk?

    One of my favorite books is The Signal and the Noise by Nate Silver. In it, he talks about the difference between risk and uncertainty[SG1] . He writes:

“Risk, as first articulated by the economist Frank H. Knight in 1921, is something that you can put a price on. Say that you will win a poker hand unless your opponent draws an inside straight: the chances of that happening are exactly one chance in 11. This is a risk. It is not pleasant when you take a ‘bad beat’ in poker, but at least you know the odds of it and can account for it ahead of time. In the long run you'll make a profit from your opponents making desperate draws with insufficient odds.”

He continues:

“Uncertainty, on the other hand, is risk that is hard to measure. You might have some vague awareness of the demons lurking out there. You might even be acutely concerned about them. But you have no real idea how many of them there are or when they might strike. Your back-of-the-envelope estimate might be off by a factor of 100 or by a factor of 1000; there is no good way to know. This is uncertainty. Risk greases the wheels of a free market economy; uncertainty grinds them to a halt.”

I’ve been thinking a lot about this distinction in the context of driving. Most of us recognize that there’s risk every time we get behind the wheel. According to News 9, the odds of getting into an accident are about 1 in 366 for every 1,000 miles driven. Insurance Panda estimates that over the course of your lifetime, you have about a 77% chance of being in at least one car accident.

The NTSB has found that driving while using a cell phone more than doubles your risk of an accident compared to undistracted driving. These are measurable risks. Others are just as apparent: teen drivers make up only 3.6% of licensed drivers but account for 9% of crashes. Men are involved in over 70% of fatal crashes. Again, these are risks we can quantify.

But then there’s uncertainty — the things we don’t measure or fully understand. How safe is the car we’re driving? Are we checking its safety features? What kind of drivers are around us? Are we in an area with a high concentration of teen drivers? These unknowns introduce uncertainty every time we leave the house.

Now, let’s connect this to pricing — particularly the revenue bridge. We often treat price as a risk, but unless we’re measuring it, it’s really uncertainty. Over the past five years, we’ve seen high inflation, supply chain disruptions, and shifting market dynamics. Some companies have adjusted their prices accordingly. Others haven’t even started. Those that have are still not measuring the impacts [SG2] — they’re not just facing risk; they’re facing uncertainty. They don’t know what they’re missing out on. They don’t know the risk of customer churn if prices change. And they don’t know how much revenue they’re gaining or losing by standing still.

So let’s start measuring. Let’s do what Nate Silver suggests: turn uncertainty into risk — something we can quantify, understand, and act on. Because risk greases the wheels of a free market economy. Uncertainty grinds them to a halt.