Back in November 2010, I penned a piece for Bloomberg about the absurd meme circulating regarding the impact of Uncertainty.

The key point was that uncertainty was an essential part of markets, and indeed life. The future is by definition unknowable and therefore uncertain. Those who complained about it revealed how little they actually understood about not just investing, but the human experience:

“Could markets function without uncertainty? It takes only a little thought to realize that markets actually thrive on doubt, imperfect information and a lack of consensus.

Uncertainty drives the market’s price-discovery mechanism. Investing requires there to be differences of opinion. When there is broad agreement as to an asset’s fair value, trading volume falls. Without any uncertainty, who would take the opposite side of your trade?

History teaches that whenever the opposite occurs — when certainty overwhelms uncertainty — the herd tends to be wrong. In rare instances, when there is a near-total lack of uncertainty in the market, the outcome is usually a spectacular disaster.

Think of the false certainty surrounding the peak of the dot com bubble (profits don’t matter!), or the nadir in March 2009 (the abyss awaits!) to validate just how true this is.

Since then, the uncertainty trope has become the general catchall for explaining (or mis-explaining) a variety of future events.  The list of uncertainties are long:  The fiscal cliff, US tax policy, US health care laws, what happens in Greece, will we have a recession next year or not, is Housing recovering, what happens to the Eurozone, with the Euro currency collapse, what about the US elections?

I do not recall anyone saying investing was difficult do to the uncertainty caused by a potential nuclear conflagration between the US and USSR during the Cold War. Is the Greek situation today more dire and uncertain than the policy of MAD — mutual assured destruction — ever was ?

Regardless, all of these unknown events will get resolved one way or another a some point in the future. Which is, of course, how all ambiguities eventually get resolved — at some future date unknown. That is why the uncertainty claim is so absurdist. The lack of understanding today of an unknowable future ALWAYS gets revealed as the future becomes known to us.

This is how things unfold in a linear timeline.

It finally dawned on me what the uncertainty trope is all about. It took a conversation with a nervous CEO to reveal it, but believe I teased out the answer.

Most of the time, Humans exist in a happy little bubble of self-created delusion. We lie to ourselves constantly. We rationalize everything we do, past and present. We engage in selective perception, seeing only the things that agree with us.  Our selective retention retains the good stuff and disregards most of the rest. In the mind’s eye, we are all younger, better looking, slimmer, with more hair than the camera reveals.

In short, we create a reality construct that bear only passing resemblance to the objective universe.

The Uncertainty trope arises during those moments when our delusions fade. In those instances where we recognize our own permanent ignorance of the future. We are not so happy with the naked truth and prefer the comfortable lie. These brief instances where the facade fades, the curtain gets pulled back, the ugly reality becomes known to us. We get a glimmer of understanding our own lack of understanding. That’s when the grim reality of the human condition is revealed — and it scares the hell out of us.

The next time you hear someone mention Uncertainty, ask yourself this: How much less do they actually know about the future today versus what they knew last week or year? How less do they think they know?

The uncertainty trope arises not when things are uncertain — they ALWAYS are uncertain. Rather, it comes up during those all too rare instances when we mortals briefly acknowledge reality. When it passes, we all manage to go back to our previously constructed artificial reality.

This Matrix choice of choosing the red pill or the blue pill is a Hollywood fantasy. In the real world, the Blue pill dominates. You can take the Red pill, but for most of humanity, the reveal lasts only a very brief period. The blue pill, the one of the comfortable fantasy, eventually reasserts itself.

Your construct beckons . . .


Kiss Your Assets Goodbye When Certainty Reigns
By Barry Ritholtz – Nov 9, 2010 9:00 PM ET

Category: Apprenticed Investor, Philosophy, Psychology, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

36 Responses to “Revisiting the Uncertainty Trope”

  1. dancingdiva says:

    You are correct; there are always uncertainties. But the level seems higher than in the past since too much is dependent on the actions of people – governments and central bankers around the world – which are both notoriously slow to act and their actions are often for political and not economic reasons.

    The market directtion based on supply and demand economics I find simple. Trying to discern the action of politicians, who will heavily influence the economics, isn’t.

    While I realize in the long run, ultimately, the politicians are likely to do the correct thing, will we have a crisis first?

  2. Petey Wheatstraw says:

    Sounds like the psychological basis for gambling, religion, superstition, and vacation planning.

    We are what we are.

  3. [...] Barry on all the bullshit "uncertainty" talk.  Please let me know when things will be certain again.  (TBP) [...]

  4. Robert M says:

    If only Congress, the President and the Supreme Court would read and understand this. All the talk is the economy can’t recover because of the uncertainty of tax policy, of fiscal policy , of foreign policy…. Yet they try to set certainty
    It is also just more proof of innumeracy in America

  5. Casual_Observer says:

    The only thing I might say differently is that the uncertainty trope may come up more often when we have put ourselves, either individually, or collectively, into a situation in which we have foreclosed some of our possible reactions to uncertain future events. The over leveraged homeowner worries much more about the same uncertain future than the prudent saver who has paid off his or her house. The country that has over leverages itself to pay for, among other things, wars of choice, looks differently on the same uncertain future than the country that has prudently governed it’s budget during times of prosperity.

  6. krice2001 says:

    Interesting post Barry. This reminds me of an interesting study I read about on a few months back. In the study, they gave people tasks to do that involved uncertainty (as they always do I guess). But they compared two groups – One group had a current diagnoses of depression and the other group did not. They asked each person in each group to estimate how successful they thought they would be at performing the task (accuracy and time, I believe) prior to attempting.

    Results? The group with active depression was far more accurate in predicting their own outcomes. Those not depressed, as a group, were way too optimistic. Apparently, part of depression may be understanding your limitations and ability to deal with uncertainty.

  7. Richard R says:

    I got your certainty right here – go invest with Madoff.

  8. krice2001 says:

    I guess the other conclusion is that the “human condition” of over optimism allows people to believe they are better at dealing with uncertainty than they really are. When confronted with the limitation, it becomes unnerving and potentially “depressing”. I guess we function best when we do believe we are better at “things” then we truly are.

  9. ilsm says:

    Musical chairs. “As it ever was…..”

    Threat from politics is that the “political class” may be eliminated or act like they care for the masses not the the banks alone. Unlikely.

    The uncertainty, unknown how the house of cards built over 50 years in the finacial asset “wonderland” will get higher or collapse.

    “Cash holders” are betting on deflation, housing needs another 30% down,etc. Is deflation a reason to hoard cash? Transaction motive?

    Banks are bankrupt, on government life support so deflation is frightful.

    The EZ is keeping the banks alive and planning to pass deflation on to the masses’ standards of living.

    The banks need inflation for their assets to cover their liabilities.

    But the “cash holders” are going along keeping the banks alive depriving themselves of the benefits of deflation.

    No one is discussing the need for inflation in the masses’ earnings to get them out of the shape the banks are in, and maybe pick up the banks.

    But the “cash holders” are not into inflation despite how good it is for their banks and the rest.

    German austerity, spannungsbogen (German word used by Frank Herbert in Dune) , lately was for rebuilding the east zone, not life support for banks.

    Hyperinflation did not create fascism, nor give it much of a boost in view of the depression.

    The Tea Party………………………..

  10. Bruman says:

    I agree that breakdowns in diversity of opinion tend to precede spectacular disasters, but I’m not so sure that certainty about things in itself causes disaster. I think part of the challenge is that the herd is right about an awful lot of things. The real question is trying to figure out which things the herd agrees on which are true, and which aren’t. That’s what the “item X is already priced in” is all about.

    Will the markets be open tomorrow? Most people will have the exact same opinion on this every day, and it doesn’t effect stuff. One day, something bad happens and markets close as a response, and someone who was an outlier will look brilliant for a day or a week, and talk about how important it is to be contrarian in investing. But quite honestly, for most of the time, the fact that everyone agrees on this point causes NO problem at all.

    You can say that I’m picking a trivial point on which everyone agrees, but the point is that many many points of agreement seem trivial UNTIL THEY AREN’T.

    All I’m trying to say is that you can’t simply look for points where everyone agrees, and then decide to disagree. You have to have a BASIS for your disagreement. It’s not enough just to say “I’m contrarian, so I’m going to do the opposite of the herd.” The herd tends to be long the market, so someone who is contrarian for the sake of being contrarian (i.e. without an alternate rationale) would be short the market constantly – which would be a bad thing over the long term.

    What I find fascinating in markets and am trying to get a better feel for is how perceptions of certainty and uncertainty about market-relevant stuff change over time, and what the catalysts are for that.

  11. Bruman says:

    (oops, said effect instead of affect: I think I intended to say “has an effect” and then decided to change to “affects stuff”)

  12. streeteye says:

    “The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.” – W. Buffett

  13. dead hobo says:

    Uncertainty and its effects have a direct relationship with how close your objective will affect you personally. For example, I am uncertain about the effect of cane toads population explosions in Australia, but this does not keep me up at night as I live nowhere near Australia. However, the uncertainty of an investment decision that may cause me to only be able to afford beans and dried dog food for nourishment when I am elderly will make me stop and think. Likewise, a sociopath couldn’t care less about uncertainty with OPM unless somehow a possible personal cost registers, which is unlikely since acceptance of risk is a trait of the sociopath.

    Uncertainty is one of those terms that uninformed business reporters toss out when they need to fill out an article. It’s generic, like the word ‘investor’ … such as when the phrase “investors decided to do X because of Y” is used. X and Y are undoubtedly unrelated, but reporters don’t care because readers are generally ignorant of economic relationships and will often think the reporter knows more than them (probably true but both are probably in need of some good book learning).

    Uncertainty is also a great tool to use if you want to manipulate someone. “Give me $700 billion now or everyone dies” (paraphrased Hank Paulson) works quite well if the stakes are high, you have credibility, and you perceive a vulnerability. Throw in a short term deadline and let the imagination in others run wild with adverse consequences and you have all the tools you need to clean up. (Expect this in Europe on regular basis) This is a technique broadly known as ‘distraction’. The proper technique to deflect it is to call a time out, slow down the pace being forced onto you, ask questions, and think. The best advice I ever got in life was ‘never play someone else’s game.’ Example: The world economy will die a horrible death if the euro is abandoned. Thus, we must bail out the countries that can’t and never will properly manage their own financial affairs properly.”

  14. Moe says:

    Uncertainty = an excuse for doing nothing.

  15. AHodge says:

    so right
    know how little you know
    i penned a piece called
    Risk Volatility and Uncertainty-how Uncertain Should you be?
    for Futures mag about 25 years ago
    and concluded nearly everyone top finance guys and corporate treasurers in oparticular
    suffered from “volatility myopia”
    the options markets are constantly pricing expected future price moves
    VIX and all the other volatility quotes are one standard deviation annualized
    go figure it out or calculate your own 50% confidence ranges
    they are bigger than you think!
    for S&P the range- up and down together, is maybe 350 points for one year out
    the options market will in effect price you that bet.
    at that level you know exactly how uncertain the market is–a lot

  16. RC says:

    Clarity of thought ….. delivered by BR!!!

  17. AHodge says:

    on the other hand all this politial blah blah about the other side creating market and investment uncertainty and withdrawal?
    Not totally wrong but complete bullshit as major cause
    the main policy reasons driving the high vol quotes
    are the finance collapse and responding new third world macro policies in US and Europe
    both sides are responsible have no answers
    and arent going to fix much
    in the next several years anyway

  18. Moopheus says:

    Moe, not just an excuse for doing nothing, but actively resisting anything being done. I agree with Barry about people’s desire to live with delusions, we all do it to some extent or another, no matter how much we try not to, but I also think that the current meme is being deliberately exploited for political purposes. I.e., it is a code, like “job creator.” When a Congressman uses “uncertain” in a speech, what he means is, my campaign donors want less regulation, and I am uncertain that they will continue giving me money unless I give them what they want.

  19. whskyjack says:

    But there basic imutable certainties. If they didn’t exist then neither could insurance companies nor casinos. The Casino may never know what this roll of the dice will do but at the end of the week and many thousands of dice rolls they know exactly where they will be.

  20. Joel826 says:

    The uncertainty meme is ideology based and exists to deflect from the actual cause, lack of demand. As Krugman pointed out numerous times, if one asks business people, and not their lobbyist, why they aren’t hiring, they tell you it’s because of poor sales not uncertainty (e.g. over Obamacare.)

    But acknowledging that sales are the cause of lack of hiring goes against the convenient right-wing narrative to blame Obama’s policies – regulations and (false) growth of government. In addition, it would suggest that the rational policy would be to increase demand and thus government spending – policies the hard right are ideologically opposed. Thus, an alternative ‘cause’ had to be found and thus ‘uncertainty’ was born.

    It should be obvious that businesses face uncertainty all the time without inflicting paralysis. Car manufacturers are uncertain about how many cars to paint red, blue and silver. Dress makers assume the uncertainty about new styles and sizes and yet the economy doesn’t grind to a halt.

  21. Conan says:

    As applied to investing I think this comes from the long secular cycles of Bull & Bear Markets;

    Naturally people like Bull Market Cycles where they can just add a monthly amount to their 401k and all is good or just buy dips…Then they can watch a steady rise in their investments

    However in Bear Market Cycles the market is more volitile, preservation of capital is paramount and being able to invest in a market that goes both up and down in large swings is much different skill set.

    So I can see where many wish for the “uncertanty” to go away…they want the certainty of a Secular Bull Market….

  22. Julia Chestnut says:

    “Perfect information” was always one of those assumptions in economics that bothered me no end. I wondered, if everybody had perfect information, how would a sale of equities ever occur? It is two divergent views of the facts on the ground and their meaning that makes two people willing to sell or buy at prices someone else finds attractive.

    Uncertainty is your friend – in most all situations. No one’s brain particularly likes it, and some hate it. But it is really unmanageable risk most people dislike and misidentify as “uncertainty.” “Uncertainty” just means I feel uncomfortable about my ability to identify and manage the risks I might encounter. I find certainty unspeakably dull.

    Under most circumstances, the background level of uncertainty involved in life is easily hedged: it’s those game changers that make things hard. Ordinary people lack the ability to hedge those kinds of events, but also often lack the ability (or time or inclination) to see them coming. To me there is a very great distinction between the ordinary hum of background uncertainty/risk that makes opportunities and the kind of risk that strikes like a volcano eruption. When people sense the latter, I think that they have a hard time wrapping the lizard brain around it.

    And yet the word “uncertainty” gets used for all of those kinds of unknowns when they call for very different strategies and levels of benign neglect.

  23. VennData says:

    When ever some idiot says the financial markets are more uncertain now than period X, ask them to state the measurement they are using.

  24. denim says:

    Barry, recall there is a whole industry sector that specializes in creating anxious uncertainty…anxiety complexes in us, and then selling us the cure for it. Recall psychoanalyst Sigmund Freud’s nephew, Edward Bernays, and what is now called Public Relations. Bernays was the founding father of the field. It has been used to manipulate public opinion to sell everything from cigarettes to women to heavily flawed political “leaders” to the sheeple. The power of these psychoanalytic techniques corrupt the user like any power does. One can sometimes see the politician’s contempt that this imbues for the very victims that they manipulate.
    BBC’s political documentary on the PR politics:

  25. RW says:

    I dunno, if apocalyptic rhetoric can induce a major political party to consciously and explicitly vote for the revocation of the “full faith and credit” of the United States, it may be unduly sanguine to argue uncertainty is essentially a constant rather than a dependent variable.

    Perhaps a more formal definition of terms would clarify what is meant here; e.g., how does uncertainty differ from risk?*

    *In my work it certainly does – within limits I can quantify risk but I can only give uncertainty a general range with the understanding that range could be wildly off if I missed something important.

  26. faulkner says:

    Great post Barry. The term “uncertainty” is an emotion arousing dichotomy. The human need to be right (and not wrong) is basic. Most people admire, and want to be, confident and certain. Uncertainty (nuance) is equated with weakness. Repeating “uncertainty” over and over again activates a network of negative associations. Any name nearby becomes part of it. This is all System 1 stuff (Kahneman) Your observation, “It takes only a little thought to realize …” becomes very difficult for most people in this condition.

  27. Malachi says:

    Thanks Barry. Great stuff.

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  29. wngoju says:

    BR – Good post. But… the Uncertainty meme is mostly flaunted not so much about investing as about why Bidnus ain’t hiring/expanding. Joel826, above, is right on.

  30. hawleyl says:

    Another view of uncertainty (not exactly the trope of this topic):

    In physics there is an Uncertainty Principle. This involves our ability to measure. For example one cannot simultaneously accurately measure an object’s velocity and position. This is because velocity is a change in position. Are there parallels in the market, e.g. how accurate can one simultaneously measure risk and reward?

    Regarding the main thesis of this topic, I would quote Oscar Wilde: “Illusion is the first of all pleasures”.

  31. Giovanni says:

    How much uncertainty is added to the process when success is determined by the movement one way or another of the price of a security (or its derivative) instead of the results of the underlying enterprise which the Raison d’être for the security being created in the first place?

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