BEING CERTAIN ABOUT UNCERTAINTY

Can we ever be certain about uncertainty?

It always amuses me, these quants who believe they can measure everything -- even uncertainty - They even build the measurement of uncertainty into complex economic\mathematical models and think they can predict it. There are unique events at the margin and by the time they become statistically significant they have gone,perhaps never to happen again. Like Nicholas Naseem Taleb - who argued for Black Swan type occurrences. No-one had ever seen a black swan and therefore no-one ever expected to see one but that does not mean that Black Swans do not exist.

 

The Black Swan theory of events is a metaphor that describes an event that is a surprise (to the observer), has a major effect, and after the fact is often wrongly rationalised with the benefit of hindsight and everyone is good at doing that. These events are hard to predict, rare and impact hugely on society. They are beyond what we would normally expect. Their probability is difficult to estimate because they have never\rarely happened before and so we don't have much hard evidence to go on. In addition many people are blind or ignore uncertainty and even do not appreciate the huge impacts such events can produce. This mindset needs to change.

 

  Dutch explorer Willem de Vlamingh discovered black swans in Western Australia in 1697 -So you see they do exist. We need to think of a unique event which might affect us hugely in the next 5 years. How might we and our respective organisations cope with something we had never ever thought would happen? Could 9\11 really have been predicted and how did we cope with it when it happened? We seem to think we can plan for everything but do we need a generalised intuitive approach to cope with uncertainty when something has never happened before and\or we do not have enough experience of similar events to create an action plan for coping with them? Some times we need to be intuitive,impulsive and experimental to cope with these outliers. Yes sometimes we need to improvise and we need to get better at doing that.

Indeed Nicholas Taleeb has just published a book on how we can gain from disorder. We all need to be antifragile. He argues that the worst case scenario will be exceeded - instead of trying to predict the future we should try to benefit from these shocks (Black Swans) when they occur.Put more scantly we need to learn from mistakes. Too much stability lets risks accumulate until there is another disaster.Sometimes stability is false - like when dictators keep power by force -- society is then stable but is not healthy. Can we use these unexpected events to improve our position? We need to know when the gains from a surprising position\event outweigh the losses.Over reliance on one employer can imply that sudden unemployment will cause a huge shock to the individual concerned.

The review of Taleeeb's book can be read in the link below:

 http://www.economist.com/news/books-and-arts/21566619-how-surprises-make-you-stronger-stress-best



In certain circumstances -surprises can make you stronger - Image from the Economist