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Thoughts on living with uncertainty

General Ideas

Switch on the TV news, follow Twitter or read a paper and it can feel like we are living in an era of high, perhaps unprecedented, uncertainty.

We certainly seem, over time, to have become more aware of uncertainty. Since the 1940s references in English language books to uncertainty, volatility, complexity and ambiguity have soared. The term Chief Risk Officer did not exist before the mid-1990s. Now CROs are an established part of many large companies. In the 1990s the US army War College coined the term VUCA in to describe an apparently new world of volatility, uncertainty, complexity and ambiguity.

But has the world really become more uncertain?

Unlike economic activity or human life span, there is no definitive way to measure uncertainty. Moreover, uncertainty is heterogeneous. How can you add together the risk of a catastrophic meteor strike on the earth, with the risk of falling off your bike or of war breaking out in the Middle East? And while some risks, for instance of certain infectious diseases, disappear over time, new ones, such as cyber-crime, emerge. Different people and organisations are sensitive to different types of risk. Perceptions of uncertainty depends on who you are, where you are and what sort of uncertainty is involved.

One category of uncertainty, in relation to financial and economic risk, is running at elevated levels. Equity market volatility – a standard measure of uncertainty – has run at higher levels since 2008 than in the years before. Stanford University’s measure of press references to economic policy uncertainty has also soared since 2008.

But uncertainty is as much about psychology and perception as science. One approach to unlocking this is to ask people how they feel. In December, 89% of respondents to Deloitte’s CFO Survey said their businesses faced high levels of economic and financial uncertainty. Measures of business and consumer confidence provide proxy measures of uncertainty. By and large, when confidence is low uncertainty is high.

The snag with perceptions is that we are prone to biases. We assess risks not on statistics but on how easy it is to recall examples from memory. Negative events tend to be etched into our minds deeper than positive ones. Our collective memory short and we tend to compare today with the recent past.

Perceptions that we live in exceptionally volatile times arise partly because we are comparing the period since the global financial crisis, in 2008, with the period that preceded it.

That era, from the mid-1980s to 2007, was one of sustained growth and macroeconomic stability in much of the industrialised world. Globalisation, technological change and better economic management were widely thought to have brought about a new era of prosperity.

What economists dubbed the Great Moderation was accompanied by an easing of geopolitical tensions. The collapse of Communism in Eastern Europe in 1989 started a process that brought the Cold War to an end – or so it seemed at the time. In 1992 the US academic, Francis Fukuyama, wrote The End of History and the Last Man, arguing that the triumph of liberal democracy and free market capitalism in the West could mark the end point of the West’s political and economic evolution.

With hindsight this sounds euphoric. But it is true that, at least for the world’s rich economies, the last eight years have been choppy compared to the decade or so that preceded it. But if you take a longer perspective risk and uncertainty are very much the norm.

In the 1970s the West endured soaring inflation and deep recessions. The 1970s were a poor decade for the UK: it experienced a banking crisis, double digit inflation, two recessions and widespread and debilitating industrial unrest. UK equities lost 70% of their value between 1972 and 1975.

Geopolitical calm is hardly normal either. For most of the post-war period the threat of nuclear war loomed large. In 1961 the Cuban missile crisis brought the world to the brink of nuclear conflict. The 1970s witnessed the 1973 Arab Israeli War, a soaring oil price and the Iranian Revolution. Terrorism is a major concern today, but in the mid-1970s deaths from terrorism in Europe ran at around four times the levels seen in the last ten years.

In the West we know little of the tremendous reduction in risks facing the majority of the world’s population, those living in emerging market economies. At the start of the 1980s 44% of the world’s population lived in extreme poverty. By 2015 that proportion had fallen to under 10%.

Looking further back, but within living memory, the world has seen the most damaging war in history and the Great Depression. Compared to the risks people across the world lived through for much of the twentieth century, we live in stable times.

Human progress has largely been a quest to mitigate and manage uncertainty. The explosion in incomes in the last 200 years has helped reduce many of the greatest risks, from disasters, poverty and disorder. Much of the infrastructure of modern society – the welfare state, central banks, government regulation, pensions and insurance – counter and share risk.

Over time the world has become a less risky place but, paradoxically, prosperity has made us more aware of, and sensitive to, risk. It is not hard to think of categories of risk that many of us manage today – from providing health insurance for our pets, to eating exactly the ‘right’ foods or wearing a helmet while cycling – that would have been unknown or unimaginable to earlier, poorer generations.

Uncertainty can be managed and diminished, but cannot, entirely, be eliminated. It is an inherent feature of existence.

Warren Buffett put it perfectly in a letter to investors in 2012: “Of course, the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them – usually because the recent past has been uneventful”.

So how can you get some sort of perspective?

When major events break they subsume all else. That was the case with the Brexit vote and the US elections. At such times it is worth reminding yourself that today’s news will not be the sole, and probably not even the most important, determinant of our world over the coming few years.

We should avoid placing too much weight on the latest fevered headline or market moves. Just because something is in the news doesn’t mean it is important – and vice versa. Media old and new do not necessarily give prominence to what shapes our lives. Looking at the hard data yourself, rather than relying on someone else’s conclusions, helps. Thinking against the crowd, in a contrarian way, provides new perspectives. But perhaps the best antidote for short-termism is simply to read more history.

FX Street



11 Comments on "Thoughts on living with uncertainty"

  1. onlooker on Mon, 13th Feb 2017 12:52 pm 

    Life never makes any guarantees except maybe death. So those who try earnestly to live with certainty are fools

  2. BobInget on Mon, 13th Feb 2017 1:26 pm 

    We who are able ‘hedge’ against uncertainty.
    Driving across town, the most dangerous thing most of us are liable to do in a single day. To ease our minds and those with which we do business with we ‘hedge’ against sickness, accidents, fires, windstorms, earthquakes even terrorism. That’s called ‘insurance’.

    Life hedging is called ‘assurance’. So far as we know,
    no one ever gets out alive.

    Sixty years ago right up to today, some of us are digging fall-out shelters. Stocking up on dried food,
    ammunition and canned water. Another hedge.

    Mayans, early Christians and Jews built great forts atop of tall mountains for protection.

    Dictators, Presidents, super rich, still to this day build bunkers, now called ‘condos’, deep under mountains.

    Am I missing the point when I ask, what good will all this survivalist action do us 99.9.9 % ?

    I, for one am glad I lived to be able to do what I’m doing now, expressing myself more or less freely using my own name, publishing into the unknown. Driving a neat little German car that takes me everywhere I need
    using solar energy gathered on my little berry farm.

    What privilege! No finite food storage, no major stash of ammo. No earthquake or terrorist insurance either.

  3. Davy on Mon, 13th Feb 2017 1:30 pm 

    There is now more risk than ever before for man in his modern world of deception. There is a resilience to globalism that makes all locals less risky and at the same time more risky. Our economic system is now characterized by dispersed risk of TBTF nodes of support in a global mechanized cog that keeps goods and services flowing. Locals in failure can be supported by the global making the whole system robust on that level. The dangers arise if the global system itself breaks down then all local are vulnerable to that break down and at the same time. We are now interconnected in a trap that is a balancing act of competing to make our local succeed while we try to cooperate to avoid damaging the global system that supports us all. This is now complicated by planetary limits to growth placing competative pressures on cooperative imperatives. We now have further enhanced the risk to include planetary risk found in collapsing ecosystems and destabilizing climate. This trend is towards increasing risk not less.

    There is a wisdom to insecurity. If you embrace your anxiety of life’s risks you can open yourself up to realistic living. This is not transcendental but instead practical. It provides the sobriety of action that consists of good lifestyles and attitudes. In this time of great uncertainty in a world larger than it should be yielding is a good principal of self preservation. This is hard for the young to accept who want to protest. The problem with protest is the reasons for protest are empty. What good is it to protest being trapped? It is best to acknowledge you are caught and make other arrangements.

  4. Apneaman on Mon, 13th Feb 2017 2:53 pm 

    There is no certainty. Any species can just be sitting there minding it’s own buisness and BANG, some cancer comes along and wipes them out.

    Climate change is already battering hundreds of animal species

    “We have the knowledge to take action,” says Lee Hannah, a conservation ecologist and senior researcher at Conservation International, a non-profit based in Arlington, Virginia.”

    https://www.newscientist.com/article/2121188-climate-change-is-already-battering-hundreds-of-animal-species/

    “We have the knowledge to take action…”

    Here’s how we doing it.

    Now Trump’s Going After the Bumblebees
    The administration just delayed endangered status for a bumblebee species that’s on the brink of extinction

    http://www.motherjones.com/environment/2017/02/trump-bumble-bees-neonics-enadangered

    If not Cheeto, some other captain of Cancer will sign off on the cancer legislation.

  5. makati1 on Mon, 13th Feb 2017 5:27 pm 

    WE always live with ‘uncertainty’. Sometimes more than others, like the present. Uncertainty is the blessing/curse of having intelligence. We know we are mortal. We understand uncertainty.

    Animals only know ‘now’. Tired. Hungry. Aroused. Scared. That is being an unintelligent animal basing life only on instinct and feelings.

    At least 90% of what is in the ‘news’ is not important to ourselves. I have cut back on reading ‘news’ and mostly concentrate on only those events that might affect me personally. Those I can use to live better prepared for what may come. All else is someone else’ problem.

    I have no debt. I do not play the Stock Market Casino. I have no IRAs or 401Ks to worry about. I do not own property or a car. I do not care what the price of oil is or how much is left. I do care about the climate but cannot do anything to change it. Likewise the increasing chance of world war. I can do nothing to influence that either. I lived thru the best of times in the U$ and am now watching the worst of times appear, only now I am 8,000 miles away from the coming storm. Life is good. Uncertainty is normal. Adjust or die.

  6. penury on Mon, 13th Feb 2017 6:03 pm 

    In the current era uncertainty appears to have increased. I do not ascribe to that theory.In the pre Internet age and prior to 24 7 bombardment by “news’ organization a person could go for days without having rape,robbery,murder and war shoved into their reading or viewing. If a tragedy happened some where else it might take weeks to hear about it, if you did. The current mantra of “news” organization is if it bleeds it leads. All local “news is subordinate to any really good pictures that are available, and of course if “children” are involved it becomes the heart (warming) or (wrenching)moment of the day. So on a daily basis people are bombarded not with actual “news” but with hours of pain, suffering and death even that which occurs in countries that most U.S residents could not locate on a map if they knew what a map was. Keep the “Sheeple scared, celebrating or worried and your control over them is increased. In other words its policy.

  7. JuanP on Mon, 13th Feb 2017 7:29 pm 

    “Terrorism is a major concern today” Not for me! I don’t give a fuck about terrorism; I never did. It is a manufactured threat. I am concerned about overpopulation and environmental destruction, though. One of my favorite sayings is “The only certain thing in life is death”. Forget taxes; most people who’ve lived never paid taxes.

  8. DerHundistlos on Tue, 14th Feb 2017 1:01 am 

    TRUMP ADMINISTRATION SAYS NO TO ENDANGERED DESIGNATION FOR BEES

    The first endangered designation for a bee species in the continental U.S. was due to take place for the critically endangered Rusty Patched bumble bee (also, a national survey revealed that between 04/2015 and 04/2016 44% of honey bee hives were lost) until the Trump administration refused protection.

  9. Marty on Tue, 14th Feb 2017 12:53 pm 

    Davy,

    Do you mean to say “locales” referencing a locality ?

    -Marty

  10. Davy on Tue, 14th Feb 2017 1:57 pm 

    Marty, not sure if my usuage of “locals” is proper or not. I am using it as a noun signifying a small community as opposed to the “global”. I began using this a few years back in regards to the expression “delocalized locals” which is a description of “locals” stripped of sustainability and resilience from their dependence on the global system. It is more a term of systems studies. I hope that helps.

  11. makati1 on Tue, 14th Feb 2017 4:00 pm 

    “Keep the Sheeple scared, celebrating or worried and your control over them is increased.”

    BINGO! Perfect description of today in America. Control!

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