Uncertainty and Our Unhealthy Obsession to Tame It

Figuring out how to appreciate uncertainty through the works of George Soros and Karl Popper.

Modern fast paced careers have forced us to view life without an appreciation for uncertainty and humility. How does one go about uttering the phrase "I don’t know"? For some It is conducive to humiliation by a thousand cuts.

In fields such as Venture Capital or Activist Investing one would consider such an utterance akin to career suicide. This obsession with certainty has even seeped its way into how academics approach economics, not from the view of answering questions that are inline with human uncertainty but by binding theories into generalizations. In a world of complexity, how can we base our decisions on such generalizations?

In his theory of reflexivity, George Soros ponders over the propositions of worldly complexity. He believes that investors in financial markets don't tend to make decisions based on objective reality but rather on their perceptions of reality instead. He argues that the field of economics has gone to great lengths to eliminate even a slight whiff of human uncertainty that is associated with reflexivity in order to formulate universally valid laws similar to Newtonian physics. The irony lies in the removal of a fundamental element of humans whilst attempting to study human decision making. Soros goes further to say that the concept of economics equilibrium is an extreme or near-extreme condition that is unsustainable.

Soros based the groundwork of his theory on the works of the Austrian philosopher Karl Popper. Popper laid down an understanding of certainty and uncertainty in scientific laws. He believed that scientific laws cannot be verified beyond a shadow of a doubt: they can only be falsified by testing, with one failed test being enough to falsify but no amount of confirming instances to sufficiently verify.

This simple framework when applied to the modern frameworks of banking and risk management causes conflicts. It was that very conflict that led to the 2008 financial crisis where managers' belief that price deviations occur at random broke down. No matter how many times the model fell in line with equilibrium, one failed test should have falsified the claims of their risk management being "Air Tight".

Conclusion

Both Popper and Soros understood the important nature of being open to falsification. The world around us is complex yet we are obliged to simplify the world through timeless antiquities and dichotomies, sometimes even without question. We don't even realize that these very dichotomies taint and mould our thinking into a subjective mental construct of its own, where if so and so event does not fall in line with our construct, then it must be incorrect. Clearly this is not the case.

Notes

For further reading see George Soros, Fallibility, Reflexivity, and the Human Uncertainty Principle and Robert Ackermann, The Philosophy of Karl Popper, University of Massachusetts Press.