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Uncertainty and Prediction
The Web of Webs
The world economy is in infinitely complicated web of interconnections. We each
experience a series of direct economic interrelationships: the stores we buy from, the
employer that pays us our salary, the bank that gives us a home loan, etc. But once we
are two or three levels degrees separated, it’s impossible to really know with any
confidence how the connections are working. That, in turn, shows what is unnerving
about the economic calamity potentially accompanying the coronavirus.
In the years ahead we will learn what happens when that web is torn apart, when
millions of those links are destroyed all at once. It opens the possibility of a global
economy quite different from the one that has prevailed in recent decades. Or, as John
Kenneth Galbraith has said, “we have two classes of forecasters: those who don’t know and
those who don’t know they don’t know.”
The Turkey the Day Before Thanksgiving
As Naseem Taleb points out, “if you are turkey making predictions about your future the
day before Thanksgiving, you will believe you are quite well fed with a bright and
prosperous future.” No amount of sophistication is going to change the fact that all our
knowledge is about the past and all our decisions are about the future. Or, another
quote, this one from Lao Tzu, “those who have knowledge don’t predict, those who predict
don’t have knowledge.”
It is essential to confront our personal bias because we can foresee the future only when
it is consistent with our own perspective (and wishes) and even obvious facts are ignored
if they are inconsistent with this desire. From this bias we create forecasts and forecasts
create the mirage that the future is knowable, and we understand those forces that will
create the future. Or, as one more favorite quote from Warren Buffett says, “forecasts
usually tell more about the forecaster and about the future.”
Everyone Knows That’s Right and Let’s Hope They’re Wrong
Obviously, this is an oversimplification because there are some things we can know
about the future at a macro level. Everyone knows things such as GDP growth,
consumption rates in the economy, demographics, and mortality rates etc. within a tight
range of forecasts. We also know that forecasts, over whatever time frame, whether it’s
minutes or hours, or months and years, that produce significant profits are the forecasts
that correctly predict radical deviations and inefficient pricing from historical trends
and current broadly accepted assumptions. Additionally obvious is that these forecasts
are hard to make and are rarely correct.
Acknowledging how challenging this is requires almost radical open-minded and
objective thinking, combined with understanding what we don’t know. This can only
come from in-depth research, challenging assumptions and algorithms, revisiting and
refining that work, being diligent and willing to change your mind. As Mark Twain said,
“it’s what you know with certainty that is most likely untrue, and that’s what will get you
into trouble.”
The bottom line is establishing and maintaining an unconventional investment profile
requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear
imprudent in the eyes of conventional wisdom. We are entering a new world and must
think differently.
I’m Certain About Uncertainty
The world is an uncertain place, and it’s more uncertain today than any other time in our
lifetimes. Few people know what the future holds much better than others, and yet
investing deals entirely with the future. We have to make decisions about it. Confidence
is indispensable in investing, yet too much can be lethal. The ability to deal intelligently
with uncertainty is one of the most important skills. In doing so we should understand
the limitations of our foresight, and whether a given forecast is more or less dependable
than most. It would be foolish, amid such uncertainty, to make overly confident
predictions about how the world economic order will look in five years, or even five
months. Or, one final quote, this time from Voltaire, “doubt is not a pleasant condition,
but certainty is absurd.”

Nick Mitsakos