So, how much uncertainty can you stomach…?

One of life’s enduring paradoxes is that human beings crave certainty, but are beset by a reality in which the arc of the future is inherently unknowable. This often creates cognitive dissonance. We want to persuade ourselves that we can predict what is to come; yet (if we think about it) recognize that as being impossible beyond certain parameters (and even those can be upended, as the outcome of the pandemic has shown).

We like to think that the natural order of things is both stability and progress in our world; yet recorded history is full of discontinuities in which what had been gained was (often) irretrievably lost for at least some cohort that thought it was secure- whether Roman citizens in the twilight Rome’s empire; Greek-speaking Byzantines in 1453; numerous African polities during the era of European colonization; the Russian aristocracy and intelligentsia during the Russian Revolution; or those singled out as “class enemies” during the Cultural Revolution in Communist China. The list is long. And now we have a global pandemic which may well disrupt and shatter the expectations of whole swathes of society.

How then can one both acknowledge and control all this in the context of managing risk?

Firstly, by understanding that just because everyone else agrees with us does not mean that we must be right. Being comfortable and secure in one’s certainty is an almost certain predictor of failure when thin tails prove to be fat.

Secondly, by realizing that there is no shame in expressing doubt. It is a sign of intellectual humility, which is an essential trait in anyone who seeks to forecast future outcomes.

Thirdly, (to quote Howard Marks of Oaktree), by accepting that we must make decisions regarding the future without knowing it.

Fourthly, by recognizing that the conditionality of the future exhibits both path dependencies and randomness, which can combine to produce outcomes that are wholly unexpected

And, finally, by taking comfort from the fact that that much of what we all do is a function of judgement, and not just expertise. Professing that one is “an expert” means nothing, and is often delusional.

In reality, the future is the result of our collective effort and interaction with each other and with the world in general. That may sound trite, but it is the truth. Events such the onset of the SARS-COV-2 virus may be random (in human terms) or not, but they then have consequences as we have seen. So we have, in responding both modified and created our own future, a fact over which we have some control.

To build a business founded on sourcing, structuring, placing and managing complex credit, economic and financial risks, one can hardly abdicate any decision-making processes, and metaphorically just “throw darts at the dartboard” hoping that the ratio of bullseyes to singles proves adequate! However, one can assess probabilities, identify parameters, and learn to understand how complex systems interact in order to build and test a thesis as to why a particular risk/reward in both sound and (most importantly) bounded to the downside. At Awbury, that is what we do every day. We live with inherent uncertainty, and navigate our path through it.

The Awbury Team

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