Radical Uncertainty: Decision-Making Beyond the Numbers by Mervyn King and John Kay
I am fully aware of my ability to convey enthusiasm about seemingly esoteric topics that apparently have little appeal to most of the rest of the world. This is an internal thought that has been convincingly seconded by many who are on tier one of the holiday “book and chocolate” gift list. (Unerring on the chocolate, for the record.)
But I still lob this 554 pages onto your list without hesitation. Mostly. It is a “breezy” read given the authors have some prominence on the other side of the pond as economists. To their credit, they spend a lot of the text heaping garbage on their peer group, so they have that going for them. And that is worth reading for ANYONE while we as a world belatedly understand the failings of yet more groups of “experts.”
I present some specific selections below, but there are two other fat takeaways in the book. The first rips apart the idea that EVERYTHING can be assigned a probability, and thus very smart people with computers can simply answer any question with something along the lines of, “there’s 62% probability that X will happen.” There are a lot of questions in the world in which the answer is actually, “I just don’t really know right now,” and an attempt to quantify things with completely pie in the sky assumptions that are practically made up on the fly can cause infinitely worse problems than the original question was seeking to answer. (Read that sentence a few times before you open the news tomorrow.)
What is also interesting to this reader and writer was the “compare and contrast” arguments with a previous Cove Street holiday book, Thinking Fast and Slow by Daniel Khanemen. What if a lot of these “behavioral biases” that complicate the human ability to make decisions—and invest—are in fact part of the “normal evolutionary process,” and instead, being “rational” is what is impossible for most? Or is entirely non-existent? If people have systematic issues with probability and are thus being “irrational,” maybe that’s the normal behavior and the rest is irrational? Grad students in a lab versus real world people and situations?
I will list some thoughts and snippets from Radical Uncertainty which can be the source of further discussion.
To paraphrase the distinction between measurable uncertainty and the truly unforeseeable: There is a difference between puzzles and mysteries, and it is important to understand the difference. “What is the circumference of a circle with a radius of 2.1 cm?” is the former. “What will the lasting impact from the COVID virus be on NY real estate?” is a mystery. Also known as aleatory vs. epistemic.
Some things that are uncertain can be described probabilistically: what are the odds that we will have a hurricane hit land in the U.S. in 2020? There is a history that can be analyzed. What is the likelihood that a Democratic congressional majority will impose a wealth tax? That is a unique event—putting math on it is a waste of breath.
“One of the greatest reasons why so few people understand themselves is that most writers are always teaching men what they should be, and hardly ever trouble their heads with telling them what they really are.” — Bernard Mandeville, The Fable of the Bees
“Natural intelligence is not described by optimization capabilities, but is the result of an evolution of traits necessary to tackle complex and ill-defined problems. Experts who optimize using complex models often fail when confronted with a new challenge whereas ordinary humans do better.”
Use the model to help understand what the hell is going on rather than be the final arbiter of what is going on.
“Although most profit opportunities have been taken in a somewhat rational world, it is clear that not all are, and thus rational economic activity should focus on where the cracks lie.”
(Like Small Cap Value in public equities??)
“Gentlemen, I take it we are all in complete agreement on the decision here. I then, I propose we postpone further discussion of this matter until the next meeting to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about.” — Alfred Sloan
“Science makes progress by funeral, the old are never converted by new doctrines, they are simply replaced by a new generation.” — Max Planck’s paraphrase
“Things can be said in equations, impressively, even arrogantly, which are so nonsensical that they would embarrass even the author if spelled out in words.” — J. Hoover Mackin
Chicago’s Frank Knight, who understood radical uncertainty well, took a different view: The saying often quoted from Lord Kelvin…“that where you cannot measure, your knowledge is meager and unsatisfactory; as applied in mental and social science is misleading and pernicious. This is another way of saying that these sciences are not science in the sense of physical science and cannot attempt to be such without forfeiting their proper nature and function. Insistence on a concretely quantitative economics means the use of statistics of physical magnitudes, whose economic meaning and significance is uncertain and dubious…In this field, the Kelvin dictum very largely means in practice, if you cannot measure, measure anyhow!”
“Biases in context. The claim to identify biases in human behavior presupposes knowledge of what unbiased behavior looks like. The behavioral economist claims to know the right answer, which his inept subjects fail to identify. But only in small worlds are right and wrong answers clearly identified. Most of the observed ‘biases’ in behavioral economics are not the result of errors in beliefs or logic, although some are. Most are the product of a reality in which decisions must be made in the absence of a precise and complete description of the world in which people live, in contrast to the small worlds in which the students whose choices are studied in experimental economics are asked to participate.”
“Klein’s central finding is best summarized in his own words: With experienced decision-makers, the focus is on the way they assess the situation and judge it familiar, not on comparing options. Courses of action can be quickly evaluated by mentioning how they will be carried out, not by formal analysis and comparison. Decision-makers usually look for the first workable option they can find, not the best option. Since the first option they consider is usually workable, they do not have to generate a large set of options to be sure they get a good one. They generate and evaluate options one at a time and do not bother comparing the advantages and disadvantages of alternatives.”
In a powerful address to her Princeton students, Anne-Marie Slaughter, a distinguished American international lawyer who served in the Obama White House, argued: “Thinking like a lawyer also means that you can make arguments on any side of any question. Many of you resist that teaching, thinking that we are stripping you of your personal principles and convictions, transforming you into a hired gun. On the contrary, learning how to make arguments on different sides of a question is learning that there are arguments on both sides, and learning how to hear them. That is the core of the liberal value of tolerance, but also the precondition for order in a society that chooses to engage in conflict with words rather than guns. It is our best hope for rational deliberation, for solving problems together not based on eradicating conflict, but for channeling it productively and cooperating where possible.”
“Perhaps the most systematic study of the causes and prevention of puerperal fever was made by the Viennese physician Ignaz Semmelweis. In 1847, he discovered that the incidence of the infection was much lower for women giving birth at home than in hospital and that it was greatly reduced if doctors had washed their hands in chlorinated water. Semmelweis did not really know why this was so – he reasoned, partly correctly, that the transfer of ‘cadaverous particles’ was responsible.
All of these findings and advice were strongly resisted by the medical profession, for reasons that are easy to understand if not to sympathize with. Doctors resisted, indeed resented, the idea that they themselves caused the illnesses they were unable to treat. Angered ultimately to the point of derangement Semmelweis died in a lunatic asylum. But his analysis was vindicated and today it is safer to give birth in a hospital than in a home.”
“America’s least successful retailer’s opinion of narratives contrasts with the opinion of Jeff Bezos, CEO of Amazon, and surely America’s most successful modern retailer. Before each meeting at Amazon, executives read a six to seven page memo one of them has prepared – silently, for half an hour – before embarking on a discussion of it. These memos are ‘narratively structured’, with some taking the form of a press release for a proposed product.
Bezos believes the narratives are important, and not just because he has become the world’s largest bookseller. The timeline for writing a high-quality memo is not a few hours, or a even a couple of days, but a week or more. Outside of the meetings, he noted that “the thing I have noticed is that when the anecdotes and the data disagree, the anecdotes are usually right. There’s something wrong with the way you’re measuring.” And these management practices have been instrumental in making Amazon, just twenty three years old, one of the most valuable firms in the world.”
“Humans thrive in conditions of radical uncertainty when creative individuals can draw on collective intelligence, hone their ideas in communication with others, and operate in an environment which permits a stable reference narrative. Within the context of a secure reference narrative, uncertainty is to be welcomed rather than feared. In personal matters – friends, holidays, leisure – stationary is boring. In politics and business, uncertainty is a source of opportunity for the enterprising, though also associated with paralysis of decision-making in bureaucracies staffed by risk-averse individuals determined to protect their personal reference narratives. In the arts, uncertainty and creativity are inseparable. Embrace uncertainty; avoid risk.”
