Article Contributed Guy Kingston

“Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns -- the ones we don't know we don't know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.”

Donald Rumsfeld was widely mocked for his mangling of the English Language, but his analysis of the difficulty of assessing a situation is actually very useful.

As we try to work out what is going on in the world, we face knowns, and known unknowns, and unknown unknowns.

The knowns are the basic laws of economics and the history of all that has happened up to this point.

We know that credit is essential to keep a modern economy functioning and that credit depends on confidence. We know that credit was recently over-expanded due to over-confidence, resulting in a predictable reaction. We know that confidence now is at a low ebb and therefore credit is tight.

All this is fairly elementary. So it is inexcusable for self-styled experts or for those in positions of responsibility to claim that they do not know what is happening or why.

The unknown is where we go from here.

Even that is not entirely unknown: we know, for example, that recessions do end – at least they always have. The unknown is when. Since we know that we do not know, this is a known unknown.

In a straw poll of attendees at the World Economic Forum at Davos, sixteen predicted that growth would return in 2010 – and five predicted that we would be out of recession in 2009!

None of them predicted that the recession would go into 2011 and beyond. Those whose only source of information is the alarmist media might find this surprisingly optimistic. Of course, most of those polled serve on corporate boards and have a vested interest in talking up the economy.

Yet there is absolutely no reason why the worst should not be over by 2010 – so long as no one panics and so long as nothing unexpected happens.

Unhappily, that is where our friends, the unknown unknowns come in.

Everything that has happened in this crisis so far has been foreseeable and predictable – indeed, many predicted it. The unexpected has yet to take a hand – and it might yet.

The classic example of Chaos Theory is the butterfly that twitches it wings in Brazil and thus initiates a chain reaction that causes a hurricane in Texas.

It is a matter of fact, not theory, that small changes in the air temperature over Africa have caused the hurricanes that have devastated the East Coast of the USA to a degree not anticipated by actuarial tables, thus putting the whole insurance industry under unexpected strain. Few of the underwriters would have been able to predict those changes of temperature or would have been aware of their potential impact on business.

We have no right to feel superior. Just as the underwriters were unable to predict those changes of temperature, we are unable to predict what unexpected events, perhaps imperceptible in themselves, will have a major impact on our chances of coming out of recession this year or next.

A Congressman might quarrel with his wife over breakfast and take out his frustration at a Committee that ends up passing a bad economic package as a result.

“For want of a nail, a shoe was lost; for want of the shoe, the horse was lost; for want of the horse, the message was lost; for want of the message, the battle was lost...”

There are an infinite number of such potential variables. We can never see them all.

However, every entrepreneur still needs to make decisions – whether to expand or contract, to buy or to sell, and to save or to invest – that depend on making some sort of educated guess about what is going to happen over the next year or so.

If the last year has taught us anything, it has taught us the need for a degree of humility in making predictions – but it has also taught us that there is no excuse for ignoring the data that is available. Many things are unforeseeable – that this crisis was coming was not one of them.

About the Author
Guy Kingston produces and presents the Mind Your Own Business podcast, offering free business advice to entrepreneurs and business owners. As well as audio podcasts there are more articles like this, compelling videos and a must-read blog. All at www.myobpod.com or you can network and join in discussions on the MYOB Facebook group.

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