Uncertainty

Conceptual Overview

According to Frank Knight, when we are uncertain, only estimates can be made—things have propensities, but no probabilistic direction, and they can only be followed creatively or imaginatively. Here rules collapse into hunches, and chance into aesthetic attraction. It is the presence of genuine uncertainty—possible events whose likelihood and impact cannot be corralled by calculation—that is the wellspring of profit and the drive to create organizations. Profit emerges from overcoming the uncertainty that arises from engagement with incomplete, transient, or unanalyzable market information (pricing policies, conditions of supply and demand, behavioral inconsistencies, product failure, technological advances, and so forth). The organization is a response to this uncertainty, a resource-hungry amalgam of hierarchical procedures and roles whose aim is one of controlling its environment of operation.

Oliver Williamson argued that (along with lower transaction familiarity and higher asset specificity) the greater the uncertainty (in his case understood as the parametric uncertainty associated with bounded reason and unwitting action), the greater the hierarchical character required of the organization. Compounding this uncertainty, Williamson identified a behavioral uncertainty associated with the persistent tendency to exploit information asymmetry through opportunism (pursuing self-interest with guile). The limits of such opportunism are unpredictable and not wholly mitigated by trust. Hence we arrive at agency theory: the use of procedural interdicts and divisions of responsibility to align various organizational interests (principals, agents, employees, wider stakeholders) so as to secure stabilized, adaptable responses in the face of continual market change. This hierarchical solution, however, requires managers who are able to accurately understand and predict costs associated with information asymmetry and guile on the one hand and costs associated with creating and maintaining organizational systems on the other. These costs arise from a myriad of specific interactions between organizational interests and are typically unknowable ex ante, not only because they arise in use and so can only be understood retrospectively, but because they are associated with unquantifiable losses of individual freedom resulting from the organizational exploitation. So despite the logic of organizing, there is continued uncertainty associated both with transactions themselves (such as monopolistic pricing) and with compensating modes of [Page 1584]organization (such as changing professional codes, changing product standards, or shifting organizational boundaries).

The persistence of uncertainty complicates both the realist view of the firm as a rationally optimizing production system and the interpretive view of an organized framing of rules and norms giving employees a sense of collective endeavor. Not everything that is done and experienced within organizations can be reduced to a rational calculus of control and planning—the distinction between markets and organizations blurs. Indeed both bounded reason and opportunism might be counted as experiences of uncertainty created by organizational life. Even within the most carefully planned risk strategies designed to eliminate or reduce uncertainty, there is potential for fluctuations, modifications, and accidents, for problems to go unrecognized, and for people to confound behavioral assumptions, even those populating agency theory. Uncertainty, then, is embedded in organizational life as much as it is in market life; one is not an antidote to or definitively distinct from the other.

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