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How to Invest in an Uncertain Universe

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Most of my professional life has been spent navigating through a world of uncertainty while advising investors whose primary goal is to acquire certainty. The paradoxical nature of that combination keeps me young and grays my hair at the same time. It’s exhausting but exhilarating, frustrating but fascinating.

Our desire for certainty is fundamental and instinctive. But even as we spare no effort in our search for it, the 800 pound gorilla in the room, the question that will not go away is: Does certainty even exist? Is it achievable, or is it simply wishful thinking?

The most logical and obvious place to look for answers is the 2,500 years of recorded thinking that philosophers have given to the subject. But that is simply impossible in a column of this size. More importantly, given the fringe status of philosophy in modern society, most of us would not even relate to the arguments. So we have to look elsewhere. Fortunately there is an alternative where we can find a tangible and understandable treatment of the subject—one that relates much more to our current thinking and cultural sensibilities: science.

One plus one equals two. If certainty exists, the most logical place to find it would be in science. Four years ago I was listening to a retired academic named William Byers being interviewed on one of my favorite podcasts: economist Russ Roberts’ EconTalk. Byers was discussing his new book “The Blind Spot,” an essay on the general misperception of science in the world. I was intrigued by the discussion and bought and read the book. In looking for some fresh ideas for this month’s column I pulled Byers’ book from the shelf and after leafing through a few pages I knew that his observations about uncertainty in science would be relevant to our interactions with uncertainty in the investment world.

The incredible success of science—the process of using a systematic form of observation and reasoning to understand, control and create things—has led many of us today to view it as the ultimate repository of truth and certainty. Byers very quickly challenges this kind of thinking. He asks: “What happens then when science and mathematics discover uncertainty and incompleteness as an intrinsic and unavoidable feature of the world?”

Byers introduces us to the idea of uncertainty in science with a paradox of the simplest kind: the difference between language and reality. He writes: “Take the concept of infinity. Infinity (in-finity) means non-finite, the essence of infinity is that it cannot be captured by the finite. Yet that is precisely what defining does—it reduces infinity to something that is finite and manageable.” The very fact of conceptualizing the world in either words or numbers is nothing more than a useful abstraction—and while enormously valuable, it isn’t the same as the reality it describes.

As systematic and as rational as it is, science, Byers reminds us, “is a creative art form.” All the great scientific advances were the result of individuals who looked out at the world and saw it in a fresh new way. This means there is no absolute, no objective body of definitive knowledge that will remain unchanged. It is all up for grabs—all the time.

Physics Debate

In the early years of quantum mechanics there was a famous argument between Albert Einstein and Niels Bohr. Bohr held that the uncertainty surrounding the behavior of subatomic particles was both inevitable and inescapable; and Einstein held that the uncertainty scientists observed was due only to the current lack of understanding. He proposed that one day there would be a more complete theory that would eliminate the uncertainty. As brilliant and famous as he was, Einstein was wrong. Uncertainty is an important feature of quantum mechanics and a legitimate description of the real world; we just had to get comfortable with the idea.

In human affairs, in our personal relationships, we are naturally drawn to people who are stable, reliable, honest and consistent. Having in our lives individuals whom we can trust, who are trustworthy and whose word is their bond, gives us a feeling of solidity and predictability. This is especially meaningful in a society where those qualities are in desperately short supply.

It follows then that the desire for certainty in financial affairs is completely logical. No sane person would actively seek a life where he didn’t know where his next meal was coming from, or whether he had enough to cover the next mortgage payment.

Yet science is telling us that uncertainty may actually be the irreducible reality of life, while certainty is nothing more than wishful thinking. This idea is so unsettling to some that they will pursue the quest for certainty irrelevant to the long odds and the extremes they will endure trying to find it. Our desire for certainty is so powerful that it may explain the irrational behavior and incredible rationalizations that I’ve seen some investors offer up as they make one terrible choice after another.

Between the behavioral biases that regularly mislead us, the overwhelming flood of information that fills our screens and our heads, the perverted incentives in the financial world that lead to poor to dangerous advice, the seemingly irrational behavior of the financial markets themselves, and now the realization that the certainty we crave may be nothing more than a fantasy—the odds of success seem so enormously stacked against us, it is a legitimate question to ask whether we should just pass on the whole investing enterprise.

I think the solution to this dilemma can be found in the most mundane place: our own lives. If there is one constant in everyday life, it is uncertainty. When we wake up in the morning, we have no idea exactly how our day will end. Sometimes it progresses within the boundaries of our normal expectations, sometimes not. But anyone who has made it to adulthood understands instinctually that there are just no guarantees. The important point in this is that most people seem to be able to carve out a reasonably normal life despite the inconvenient fact that we can neither control nor predict it.

Wild Walk

When Cheryl Strayed took her first steps onto the Pacific Crest Trail, the odds were totally stacked against her—she hadn’t hiked a day in her life, much less walked out alone into the wilderness. At that moment the level of uncertainty in her life was completely off the charts. But each day that she survived the ordeal she learned something new and the odds of her success gradually increased. After a while she was competent enough to feel comfortable and capable of handling whatever came her way—until her daily experiences on the trail were becoming normal, even predictable.

While we don’t need to strike out totally unprepared into the wilderness in order to face down uncertainty, Ms. Strayed’s experience (as related in her memoir “Wild”) teaches us that we can use uncertainty as an important catalyst for personal growth—and so we discover that uncertainty, somewhat paradoxically, can be the source of our legitimate sense of normalcy in the world.

Science informs us that uncertainty is not simply an observable phenomenon: It is an important, perhaps foundational, component of how things work. Like it or not, investors and their advisors need to consider the possibility that uncertainty may be the only reality.


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