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Home > Blogs > Bill Sharon > The Certainty of Uncertainty

The Certainty of Uncertainty

Risk management | The Certainty of Uncertainty Bill Sharon

Over the past year we have heard intermittent calls for the restoration of confidence, usually by those who would relax all manner of regulation and oversight of commercial and financial ventures. The past, it would seem, adds credibility to their argument. Regulation in the financial markets and the internal financial operations of publically held companies has done absolutely nothing to prevent the ongoing crisis that we find ourselves in.

But this clamor for confidence tells us that despite all the calculations, projections and efforts by central banks to keep the flow of money moving it all comes down to how we feel. If we felt confident, we are told, then we would behave differently. The pathway to that better feeling varies from deficit spending to balanced budgets with the advocates of either position passionate about the correctness of their remedy.

But no matter what we do our feelings are only buoyed for a few days and then they once again sink. We feel uncertain that we were right to feel better.

There are many analogies to this situation; Einstein’s definition of insanity comes to mind. Another would be the problem of transitioning from a moral society in which we apply a known set of rules to every situation to an ethical one where we begin to understand that solutions are intuitive and not measured solely by numbers on a balance sheet.

We are discovering that our set of rules is no longer relevant to the problem. Laurie Hyland provides us with a pathway to understand the new context that we are all living in, regardless of whether we choose to acknowledge it. The following example is borrowed from her work although its application may be of my own interpretation.

Take a bowl and let a marble slide down its side. Eventually the marble comes to rest. In classic physics we say that the marble has reached equilibrium. In classic economic terms this is equivalent to the certainty that we allegedly crave. Now take the same bowl and fill it with fruit suspended in Jell-O. If you take a fork and attempt to remove one of the pieces of fruit, everything moves. In quantum physics that’s called entanglement. In what Hyland calls quantum economics that’s Lehman Brothers. The idea of “we are all connected” has transitioned from an esoteric mystical concept to an increasingly robust scientific theory to an economic reality.

It would almost seem that the current efforts for budgetary unity in the eurozone would reflect this new reality but I would suggest that in fact it is a continuation of attempting to apply a moralistic set of rules to an ethical challenge. Economics is a discipline devoted to understanding how we relate to each other, what it is that we think has value and how we interact with each other to enhance the human experience. Tragic as it may appear to those who have elevated the right brain to the highest form of human endeavor the rational mind is not up to the current task. Kahneman and Tversky’s Prospect Theory has been telling us for some time that the rational mind does not determine how we behave; Taleb’s Black Swan tells us that the rational mind is really only useful in describing retrospectively what has caught us completely by surprise. Our insistence on stability he says simply creates greater instability.

So, let us begin to expand this new thinking. We will find much ridicule and certainly some blind alleys but that experience will serve to refine the new approach. Ultimately it is and will be much more satisfying than trying to convince ourselves that there is such a thing called certainty.

Tags: banking , business confidence , Einstein , Kahneman , Lehman Brothers , Nassim Nicholas Taleb , Prospect , prospect theory , quantum economics , Quantum fund , risk , risk management , Tversky , uncertainty
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