Uncertainty as a Source of Value

Most would argue that in the business world, uncertainty is the enemy. After all, business managers spend a good deal of time, money and effort working to eliminate uncertainty. But Decision Strategies’ principal Pat Leach presents a different perspective in his book“Why Can’t You Just Give Me the Number? An executive’s guide to using probabilistic thinking to manage risk and to make better decisions.” His discussion is summarized here.

ROI and the role of uncertainty

How is shareholder value measured? Generally, it is after-tax ROI that most shareholders are interested in, and ROI comes from dividends and rising stock prices. With the exception of irrational market events such as the tech bubble, higher stock prices and anticipated dividends in a free market stem from one thing: expected future free cash flows.

If you could somehow wave a magic wand and remove all uncertainty from your business, what rate of return could you deliver to your shareholders in the long run?