The only certainty is …

… that there is no certainty (ok, I admit death is the only thing we can know with any certainty, but my intention is not to write about the end here, I have done that before and it didn’t end too well).

Nevertheless, we suffer from the Certainty Bias.  Our mind’s pull for certainty has different consequences.  The mind likes nice, uncomplicated beliefs which can help us make sense of a situation.   Yet these beliefs often leave us trapped by our own – often false – perceptions.

Uncertainty is great.  Uncertainty comes in the form of a chance of a future reward.  That itself is stimulative.  Nature has built into our brains (dopamine neurons) a tendency to savor the possibility of future rewards, and to put ourselves in a position where such a possibility is real.

Uncertainty is THE motivator of change.  It fuels opportunity and drives growth in general. uncertainty

Wonderful.  But hold on, isn’t investment success somehow linked to knowing  to anticipating what happens in the future, which company will grow faster, which trends will prevail, and which economies will strive?

Truth is, we simply cannot judge results in a probabilistic system over the short term because there is way too much randomness.

One way out of this dilemma for investors is to train themselves to consider a sufficiently wide range of outcomes.  For example, by paying attention to the leading indicator of “inevitable surprises.” Or by becoming risk literate and obtaining the ability to deal with uncertainties in an informed way.

Risk literacy requires emotional rewiring, rejecting comforting illusions of certainty and learning to take responsibility and to live with uncertainty.

Daring to know

Taking a multidisciplinary approach based on process and psychology offers the best opportunity for long-term investment success.  To gain an edge over the market it is necessary to have a differentiated point of view.  Going beyond the obvious.  We can’t just consider an innovation; we must assess how the market will consider that innovation.

We have to diversify our mind.

It is no secret in investing that experts who knew a little about a lot – the diverse thinkers – did better than the experts who knew one big thing (and suffer from reduced cognitive flexibility).

Still every decision is a matter of weighing probabilities.  And despite uncertainty we must act even though we have imperfect or incomplete information.  But we must still make decisions based on an intelligent appraisal of available information.

Now think carefully for a moment about your information sources.  Do you read the same newspaper, check out the same websites, talk to the same people, and review the same type of research reports over and over?  Or do you allocate time to entertain new ideas, even at the risk of wasting time on intellectual cul-de-sacs?

There is strong evidence to suggest that we do benefit from input diversity.  However, we may place greater emphasis on information that is available than on information that is relevant.  That’s why I read the morning paper/Internet explaining yesterday’s market action for entertainment, not education.

Because in the end the frequency of correctness in our decisions does not matter; it is the magnitude of correctness that matters.

 

Book Recommendations to boost your risk literacy:

any book by Nassim Nicholas Taleb like “Fooled by Randomness“, “Antifragile(my summary of key statements), “The Black Swan(ten principles for a black swan proof world)

And to diversify your mind for investing:

More than you know” or “Think Twice” by Michael J Mauboussin

Think – Why You Should Question Everything” by Guy P. Harrison

 

“Uncertainty is an uncomfortable position. But certainty is an absurd one.” – Voltaire

“It is safer to be a speculator than an investor in the sense that a speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware.” — John Maynard Keynes

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