Certainty is a delusion…

To be absolutely certain about something, one must know everything or nothing about it”- Henry Kissinger

As the wry old joke goes: “The only certainties in life are death and taxes”, yet human beings like to extend the aura of certainty to areas in which it has no credible place, with sometimes unfortunate consequences.

Even in “hard” science what are sometimes stated or perceived to be “certain” facts (axioms), turn out to be simply untrue, incomplete, or more nuanced and complex- whether the nature of the cosmos and Earth’s place within it, atomic theory, or Newtonian mechanics. Karl Popper stated that for something to be scientific it must be able to be proven false. If things are falsifiable (able to possibly be proven false) then they can be used in scientific studies and inquiry. In other, words, even “certainties” need constantly to be tested.

This fact was brought to mind recently in reading David Quammen’s excellent book “The Tangled Tree: A Radical New History of Life”, which tells the story, amongst other things, of how as recently as 1977 it was axiomatic that the “tree of life” (popularized by Darwin’s work) had only two main branches from its trunk- for bacteria and for eukaryotes (essentially everything else) and that species only changed vertically through mutation and natural selection over time. That was until a molecular biologist called Carl Woese (who was not even looking for the result), realized that, in fact, there are three branches- the two mentioned previously, and what are now called archaea. Not only that, but genes can be swapped between species- via horizontal gene transfer. So much for the certainties of what you were taught in high school biology. In fact, the “tree” is now considered to look more like a tangled web, so perhaps it should be the Thicket of Life?

When it comes to the world of credit risk analysis and management, it would be wonderful if one could be certain of anything and everything! One could then predict the true risk of loss and one’s pricing would be perfect. Dwight Eisenhower (during World War II) pointed out: “Plans are useless, planning is essential.” Of course we build models and make forecasts. These are an essential component of any financial business. However, any experienced analyst knows that actual outcomes can easily be very different from what was assumed because of some unforeseen or unexpected factor (which is one reason why we are also habitually paranoid). The real world places constraints on possible outcomes, but the number and weighting of the variables that go into assessing, say, the risk of default is inherently probabilistic. The real skill lies in understanding the range and scope of potential outcomes over time, and how to manage and mitigate actual outcomes if they deviate significantly from the range of reasonable expectations- planning, not plans, constantly updated.

History also teaches that seemingly minor variations in decision-making or apparently unconnected events can interact and cascade in ways such that what seemed “certain” and inevitable, turns out very differently. At Dunkirk, in 1940, it seemed certain that the trapped British and French forces would be overrun by the Nazi German Wehrmacht. Yet that did not happen, with the outcome that everyone knows.

So, when someone states that they are certain about something (a 100% probability!), the immediate response should be to ask how and why. At Awbury, we believe (and can demonstrate through outcomes) that our approach to risk analysis, management and mitigation is effective in relative and absolute terms; but we would never be so foolish or arrogant as to state that we are absolutely certain of the outcome on any of our transactions. That would be doing ourselves and our partners a singular dis-service. After all, our business model is founded upon assuming real risks.

The Awbury Team


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