by Kurt Cobb on 21 December 2008
http://resourceinsights.blogspot.com/2008/12/uncertainty.html
To live in an uncertain world is one thing. To know it is altogether something else. In the last 30 years policymakers and then investors came to believe that the ups and downs in the economy and the financial markets were simply bumps along the road to long-term prosperity. In fact, declines were increasingly thought to be simply opportunities to double down and ultimately make more money.
image above: Detail of drawing of Alan Watts by www.normbreyfogle.com
The certainty that we were living in stable times led some people to commit more and more of their wealth to investments rather than savings accounts. It led others to rack up huge amounts of debt believing that the good times could never end. The risk was not being in the market or not getting that house you really wanted. Likewise businesses found themselves in an environment of cheap finance. Why not lever up the company balance sheet and make even more money? Both consumers and businesses were abetted by banks and other lenders who used complex models to justify their wild expansion of lending. The models were said to be backtested and the risk properly hedged or offloaded onto investors. Investment ratings agencies seconded this thoughtless optimism with high ratings of questionable securities, ratings that in hindsight look like rampant grade inflation at a second-rate school trying to attract students. Numbers crunched on computers gave everyone a belief that profits were certain and that risk was negligible.
But, beware of those offering certainty. They probably have something to sell you, perhaps something you don't need and that may be dangerous to your health and prosperity. Former hedge fund manager and self-styled philosopher of uncertainty Nassim Nicholas Taleb has a rule of thumb: Don't trust any predictions from people who wear ties. He notes that bankers and financial economists almost universally wear ties to work. Those in the hard sciences such as physicists and chemists almost never do. Such scientists have a much better record of predicting the course of planets and the outcomes of chemical reactions than the bankers and economists do of predicting the trajectory of the economy or the markets.
But certainty sells, especially regarding those things about which we are most uncertain. The purveyors of research on the future would like to tell us (often but not always for a fee) that everything will be all right, especially if we let that purveyor (or his or her clients) make all the important personal and public policy decisions for us. (I probably should have put the word "research" in the previous sentence in ironic quotes since it is impossible to do research on the future.) Other purveyors might also tell us of dark days ahead for which they can sell us the certain and perfect defense. And, there is yet a third very small class of soothsayers who offer a message of gloom (without extracting a fee or at least a very large one) and without offering hope (at least that life will ever again be what passes for normal these days). I sometimes give this third class my attention since they tend to speak with less certitude, and they often pray that they are wrong.
A succession of developments has lifted the reputation of the few in this third class. The highest prices ever seen for oil were recorded in July this year. This was followed by the swiftest decline in the economy since the Great Depression. Nearly every market crashed making mincemeat of practically all investment advice even from those who ostensibly foresaw the crash and recommended investments that were supposed to go up in such a crash. Suddenly, those things which seemed so certain just 12 months ago are now quite shaky. What most people want to know is whether someone or something, perhaps the government, can restore certainty to our lives. But is that what we really need?
More than 50 years ago author and interpreter of Zen to the English-speaking world Alan Watts wrote a book entitled "The Wisdom of Insecurity." He made the case that feelings of certainty and security were just that, feelings. Our true and perpetual state as humans is that of uncertainty and insecurity. The world never stops changing and never stops unsettling our settled notions, at least if we pay careful attention to it.
And so, what's really necessary to feel certainty in one's life is to be oblivious to what is actually happening. For Watts a good life and a happy life, taken with all its sufferings, is one lived while paying attention. Recent events are forcing more of us to pay careful attention. But to pay attention is to feel more insecure and more uncertain. Still, instead of something to be avoided, insecurity is something to be embraced. It forces us to become more resourceful, to encounter the world as it is and to gain a measure of prudence that can serve us well when we are tempted to believe the optimistic hype of investment advisors, economists, politicians, or experts of any kind.
I find myself writing an odd sort of holiday message in this piece. When so many others are sending out words of comfort and joy and wishes for a happy new year, I am focused on getting in touch with life's inherent uncertainty and insecurity which in my view is the true cauldron of creativity in our lives. If you want to have a better year next year than you had this year, I offer no certain way to achieve it--only the insecurity and uncertainty that engender prudent and practical effort, which when we do it in concert with others can bring us the joy of working together on something worthwhile.
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