Tuesday, 27 May 2008

Uncertainty and strategy

A key issue in strategy is uncertainty in the outcome. Unlike financial return distributions, where we at least have some data to go on, and some models (albeit ones which struggle with autocorrelation, fat tails, and regime changes) there isn't much data on corporate strategy because each situation is different. I can't try the same acquisition a hundred times over to get a sense of the distribution of returns or, as Keynes said:
Our knowledge of the factors which govern the yield of an investment some years hence is usually very slight and often negligible
Usually people don't let that worry them too much not least because the downside is bounded at zero: often you cannot lose more than you put in. But there is one area where is glaringly obvious that a consideration of uncertainty is important because the returns are so volatile and possibly highly negative - nuclear power. Today we heard, entirely predictably, that:
[The] cost of cleaning up the UK's ageing nuclear facilities, including some described as "dangerous", looks set to rise above £73bn
In fact we have no reason to believe that nuclear fission has net positive value. The costs of building it, running it and cleaning it up may well exceed, perhaps by an order of magnitude, the value of the power generated. As France's nuclear safety watchdog has ordered EDF to halt work temporarily at its flagship new generation nuclear power station and half a million people were hit by unscheduled power cuts after seven power stations, including Sizewell B in Suffolk, unexpectedly stopped working within hours of each other perhaps the policy makers might like to reconsider their push for a new generation of nuclear power stations.

Update. WTF? Gordon Brown has said the UK needs to increase its nuclear power capacity - raising the prospect of plants being built in new locations. As Sting didn't write, every little thing he does is hurried, ill-advised, and foolish.

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