Uncertainty Tuesday, June 2, 2020
Mark Lilla, a professor of humanities at Columbia University, begins an article in the New York Times last month with a quote from Thomas Hobbes: The best prophet, is the best guesser. “That would seem to be the last word on our capacity to predict the future,” says Lilla. “We can’t. But it is a truth we have never been able to accept. People facing immediate danger want to hear an authoritative voice they can draw assurance from; they want to be told what will occur, how they should prepare, and that all will be well. We are not well designed, it seems, to live in uncertainty.”

And yet, that is what we have to do.

As Richard Zeckhauser says, “You might have some vague awareness of the demons lurking out there. You might even be acutely concerned about them. But you have no real idea how many of them there are or when they might strike. Your back-of-the-envelope estimate might be off by a factor of 100 or by a factor of 1,000; there is no good way to know.”

Other claims in Lilla’s article:

The pandemic has brought home just how inadequate our knowledge is for making wise decisions and anticipating consequences.

At some level, people must be thinking that the more they learn about what is predetermined, the more control they will have. This is an illusion. Human beings want to feel that they are on a power walk into the future, when in fact we are always just tapping our canes on the pavement in the fog.

A dose of humility would do us good in the present moment. It might also help reconcile us to the radical uncertainty in which we are always living. Let us stop asking for confident projections that [no one] is in any position to make — and stop being disappointed when they turn out to be wrong.

Which seems to apply all the more to investing. And yet …

How inadequate our knowledge is for making wise decisions is obvious when being wrong is part of the process. As Peter Lynch pointed out, "If you're terrific in this business, you're right six times out of 10."

And yet …

“Wall Street would have you believe that you need to know everything about everything before you make an investment,” says James Montier. “When in fact, what you need to know is relatively limited. It isn’t necessarily better to have more information. Too much information confuses. So what we actually find is that the more information you give investors, the worse their decisions tend to be.”

A problem with expert knowledge when it comes to investing - the real value of a security for instance – is that you can't put yourself in the position of the uninformed, and it often becomes counter-productive. Those people who resolutely refused to invest in start-ups during the dotcom era because they knew for a fact that most start-ups were a complete crock, missed the opportunity to make the money that those who were naive did. Insiders have an edge on naive punters. So, why aren’t they all super-rich? Because, they too, are often undone by the curse of knowing too much.

The illusion that the more we learn about what is predetermined, the more control we have.

We tell ourselves that we’ve studied the markets and we know what to expect. But, as Michael Lewis points out in his book, Panic: The Story of Modern Financial Insanity, simply knowing that something is going to happen doesn’t always help. Financial markets work in free verse, and no matter how much you’ve studied them — no matter how many times you’ve read Charles MacKay’s Extraordinary Popular Delusions and the Madness of Crowds — you remain at risk of being sucked into the passions of the moment.

And yet …

When it comes to suffering “illusions” about what’s predetermined, Wall Street asks you to trust that whatever might happen to your money tomorrow, you’ll be okay in the long run.

You’re asked to believe that markets can’t be beaten, so you shouldn’t bother trying.

But even a child understands that the way to outperform in most pursuits is to work harder and be more rigorous, not less.

Too many investors entertain a dangerously naïve disrespect for that basic effort.

Confident projections that no one is in any position to make.

If coronavirus has taught us anything, it’s that no one has clear enough vision into the future to foretell the path of the economy and the markets, let alone deftly navigate the many twists and turns. The notion that anyone, even the most seasoned pros, can reliably outsmart the markets is a fantasy.

And yet …

All decisions call for a view of the future and as the saying goes Wall Street is not filled with crooks. It's filled with people who want to earn a living.

Which brings us to Lilla’s conclusion that, “We must accept what we are, in any case, condemned to do in life: tap and step, tap and step, tap and step.”
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