The limitations imposed by future uncertainty

“Attentiveness to limitations in the evidentiary basis” (or to the limitations imposed by future uncertainty) is a very important further concept. 


Dealing with future uncertainty

Here’s how Howard Mark discussed it in his book Mastering the Market Cycle:

Most people think the way to deal with the future is by formulating an opinion as to going to happen, perhaps via a probability distribution.

I think there are actually two requirements, not one.

• In addition to an opinion regarding what’s going to happen, 
• people should have a view on the likelihood that their opinion will prove correct. 

Some events can be predicted

• with substantial confidence (e.g., will a given investment grade bond pay the interest it promises?), 
• some are uncertain (will Amazon still be the leader in online retailing in ten years?) and 
• some are entirely unpredictable (will the stock market go up or down next month?) 

It’s my point here that not all predictions should be treated as equally likely to be correct, and thus they shouldn’t be relied on equally. I don’t think most people are as aware of this as they should be.



Realistic view of the probability that we are right before we choose

In short, we have to have a realistic view of the probability that we’re right before 

• we choose a course of action and 
• decide how heavily to bet on it. 

And anyone who’s sure about what’s going to happen in the world, the economy or the markets is probably deceiving himself.




It all comes down to dealing with uncertainty. 

To me, that starts with acknowledging uncertainty and having an appropriate degree of respect for it.


As I quoted Annie Duke this past January, in my memo You Bet!:

What good poker players and good decision-makers have in common is their comfort with the world being an uncertain and unpredictable place. They understand that they can almost never know exactly how something will turn out. They embrace that uncertainty and, instead of focusing on being sure, they try to figure out how unsure they are, making their best guess at the chances that different outcomes will occur.  (Thinking in Bets)




“I’m not sure.”

To put it simply, intellectual humility means saying
“I’m not sure,” 
“The other person could be right,” or even
“I might be wrong.” 

I think it’s an essential trait for investors; I know it is in the people I like to associate with.

Reference:

In investing, uncertainty is a given – how we deal with it will be critical. Read Howard Marks’s latest memo, in which he discusses the value of understanding the limitations of our foresight and “investing scared.”

https://www.oaktreecapital.com/docs/default-source/memos/uncertainty.pdf