MGMT8015 Chap.4 Risk, Uncertainty and Testing Assumptions
Risk, Uncertainty and Testing Assumptions
Uncertainty is built into innovation
Novelty creates unknowns and unknowns create uncertainty, which makes action hard to plan.
The course separates this from risk, where outcomes and probabilities are known and insurable.
Placing a project
Dividing the number of unknowns by the number of knowns places a project on a spectrum from incremental change, where risk applies, to radical change, where uncertainty applies.
Reducing uncertainty
Uncertainty falls as unknowns become knowns, one tested assumption at a time, using a card that fixes the hypothesis, test, metric and success criterion in advance.
Where the idea is used again
The test card links this chapter to the lean startup, which tests the most critical assumption first, and to the business model task, where one tested assumption with a stated threshold answers the debrief’s complaint that some groups knew their customers only on the surface.
What this chapter covers
- 01
Novelty, unknowns and uncertainty
- 02
Risk versus uncertainty
- 03
The unknowns-to-knowns ratio
- 04
Five steps for testing an assumption
- 05
The test card: hypothesis, test, metric, criteria
- 06
Using tested assumptions in a business model
- 07
Choosing which assumption to test first
Worked example · free
Place two projects on the uncertainty spectrum
- 1Muffin ratio: 1 unknown divided by 9 knowns is about 0.11, a very low figure.
- 1Repair-service ratio: 10 unknowns divided by 4 knowns is 2.5, a high figure.
- 2The muffin is incremental and sits near the risk end, where past sales data can guide decisions.
- 2The repair service is novel and sits near the uncertainty end, so it needs assumption tests before forecasts.
Key terms
- Risk
- A condition in which alternatives, consequences and probabilities are known, so outcomes can be estimated and insured.
- Test Card
- A one-page tool that records an assumption test as a hypothesis, the test, the metric and the criterion for success.
- Unknowns-to-Knowns Ratio
- The lecture’s rough measure of uncertainty, found by dividing what a team does not know by what it does know.
Risk, Uncertainty and Testing Assumptions FAQ
What is the difference between risk and uncertainty?
Under risk, all alternatives, consequences and probabilities are known, often from historical data, and the event can be insured. Under uncertainty they are not known, the variation cannot be quantified because the situation is new, and insurance is not possible. The course argues innovation mostly involves uncertainty.
How do you measure how uncertain a project is?
The lecture uses a simple ratio: the number of unknowns divided by the number of knowns. A low ratio describes incremental work in a familiar market; a high ratio describes radical work. The measure is rough, but it forces a team to list what it actually knows before planning.
What goes on a test card?
Four statements written before the test: we believe that, the hypothesis; to verify that we will, the test; and measure, the metric; and we are right if, the threshold for success. The card also names the test, its duration, its owner and a deadline, so someone is accountable for running it.
Why does the course say innovation involves uncertainty rather than risk?
Because novel projects deal with situations that have not been experienced before, so there is no reliable data to estimate probabilities, and the outcomes cannot be insured. The lecture calls uncertainty the key problem for managing innovation, while still stressing that predictability matters, which is why uncertainty has to be reduced step by step.
How can a team reduce uncertainty in practice?
By turning unknowns into knowns one at a time: choose an unknown, make a testable assumption about it, test it, check whether it has become known, and move on. Design thinking and the lean startup, covered next, are two structured ways of running those tests with real users.
Exam move
List ten things you know and ten you do not about your venture idea, then compute the ratio. Pick the unknown that would end the venture if it were false and fill in a test card for it, including a numeric threshold set before you run the test. Keep the cards: they become evidence for the problem and customer section of your business model. Check every card has a number in the criterion box before you run it.
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