How heuristics, filters and reasonable stories help us cope with radical uncertainty and have the courage to make investment decisions.
In this episode you’ll learn:
- Strategies for coping with uncertainty.
- How to avoid being caught up in a bubble or mania.
- Why even central banks need a coping strategy.
- How money helps hedge against an uncertain future.
Show Notes
The End of Alchemy: Money, Banking, and the Future of the Global Economy by Mervyn King
To Help Put Recent Economic & Market Moves in Perspective – Ray Dalio
The Role of Emotions in Financial Decisions – David Tuckett
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Episode Summary
Many think that investors learn to navigate and ensure against risk, but in reality, they are simply learning to cope in a world of radical uncertainty. Unlike a definable risk, such as a house burning down, the economy is not something one can assign a probability to. Investors – and even banks – do not know what will happen, and managing money is an uncertain thing that changes unexpectedly. Host, David Stein points out that people need to start shifting their focus from the optimization of their investments to learning how to best cope with the uncertainty of the future and still make excellent decisions.
Investors cope because they don’t actually know what will happen
The economy is volatile, and even banks need coping mechanisms in order to make decisions. Nobody knows the future. David explains that the job of a money manager is especially difficult because they are being paid to make public decisions about something that they cannot fully predict. Sometimes their predictions are correct. Sometimes they’re not. But the people who hire them expect them to safely conduct their money through an unknown path. How do investors cope with the stress of such uncertainty? Be sure to listen through the whole episode!
The stories we tell ourselves
David explores the role that storytelling plays as one of the mechanisms investors use to cope with radical uncertainty. He explains that money managers and investors tell themselves stories about their investments, futures, and the futures of the companies they invest in. They imagine what will happen, and they act upon that story. One successful investor imagines the economy as a giant machine that is subject to cycles and rules. This is his mechanism to cope with the uncertainty. David explains that telling stories is a good thing because it enables investors to make decisions.
The consensus of market narratives, however, can be misleading and have a negative effect on the economy by making it more volatile. A consensus of narratives can lead to idealized objects in the minds of investors. There still needs to be the realization and acceptance that things may not work out as planned instead of being paralyzed by the unknown.
Filtering the unknown
Using filters is another way investors cope with radical uncertainty. Filters can include other people’s stories, paying attention to the data and fundamental rules-of-thumb. David says that studying the data can help investors form a more complete and realistic story. To keep from honing their sights on idealized and “phantastical” objects, they can learn to create reasonable stories to help them make reasonable decisions. The problem with the “phantastic” object is that it becomes so idealized that the fear of the risk is made nonexistent. The money manager may be facing a world of uncertainty, but he or she can still make educated and reasonable decisions – if their filters and stories are reasonable as well. Learn more about “phantastical objects” and what filters investors use to cope by listening to the entire episode.
Knowing when enough is enough
Each individual’s story and perception of the future influences the current economy. David uses the example of the Great Recession. People made their current decisions based upon their perception of the future, and those current decisions influenced the pathway of the future economy. Even though the future is uncertain, and our current decisions carry future economic weight, it is important to realize that great decisions can still be made. Investors use coping mechanisms that often work to navigate the monetary world. David encourages listeners to not become discouraged when investment decisions don’t go as planned. Investors need to focus on making an excellent process to reach their decisions, not on the uncertainty of the future. Be sure to listen to the full episode to learn more about the healthy ways investors can cope with the radical uncertainty of investment futures!
Episode Chronology
- [0:17] Investing is a world of radical uncertainty.
- [1:57] Risk vs. uncertainty.
- [6:01] Coping through the use of narrative.
- [10:39] Using filters to keep ourselves from being overwhelmed.
- [12:48] Staying shy of the consensus and “phantastic” objects.
- [16:04] Learning to tell ourselves reasonable stories.
- [17:01] Re-defining what makes a great decision.
- [20:52] Each individual’s decisions influence the future economy.
- [23:42] Investors aren’t alone: banks need coping mechanisms too.
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