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Musings Report 2022-41 10-8-22 Embracing Uncertainty
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For those who are new to the Musings reports: they're a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Embracing Uncertainty
Since humans anticipate the future, we seek patterns from our past experience which will help us predict what's likely to unfold.
In science, we seek laws of Nature that we can use to predict future outcomes.
In pre-scientific times, we used divination to predict future events (oracle bones, etc.)
Science demands replication of results to provide solid evidence that the proposed law of Nature is real and not just coincidence or the result of faulty data collection.
But systems like the weather, societies and financial markets are dynamic and interactive, and so we can't repeat history to confirm our theories about social change and markets.
There is no way to "prove" a theory of causality in societies and markets. We can propose that political revolutions occur when the price of grain soars, but we can't replicate the conditions we've observed in the past, nor can we set up an experiment or control for all variables.
So there is always some uncertainty about any model that claims to map the present and predict the likeliest pathway into the future.
There are numerous problems with models about social and financial dynamics: data is incomplete, and since we only manage/model what we measure, we're blind to whatever didn't get measured.
We have no perfect methods for understanding systems dynamics that lead to sudden instabilities (phase changes) that surprise everyone.
We're also prone to recency bias, the unfounded confidence we have that recent events are an accurate guide to the future.
So in finance, we turn to analog charts of the 2008 Global Financial Crisis, and are thrilled when the stock market charts seem to align: see, the market is following 2008-09 step for step.
Analogs seem to work until they don't. We are adept at discerning patterns and causalities that turn out to be illusory.
In terms of explanations, we turn to the 1970s stagflation as a model of current stagflation.
If these don't seem to map the current reality well enough, then we look at the Great Depression.
In other words, we seek a historical analog that we can use as a model or template to predict the future.
I often discuss cycles, as these are useful probability tools for predicting eras of crisis where change is more likely to be significant and rapid.
But cycles don't predict the outcome. They only predict eras of criticality / instability.
We seek models and analogs because an uncertain future provokes anxiety and complicates our planning. If we can map the future, we feel more secure and don't have to invest as much in contingency planning.
The problem is whatever model we choose may not map current dynamics and so we're caught off-guard by events we falsely considered low probability possibilities.
The problem with so-called tail risks--statistically unlikely but devastating when they occur--is that being somewhat prepared is much better than being totally unprepared.
For example, after devastating tsunamis struck coastal towns without any warning, a tsunami warning system was devised. Tsunamis are rare and unpredictable, but having advanced warning makes all the difference between unavoidable damage and avoidable catastrophic losses.
In other words, investing in mitigating statistically unlikely events follows a power-law distribution: even a modest investment can yield outsized results if catastrophic losses can be avoided.
There's always opportunity costs to every such mitigation or buffer. For example, increasing insurance coverage costs more annually, but if an accident, fire, etc. does occur, the modest increase in annual costs will pay for itself many times over.
This is an example of embracing uncertainty rather than trusting "it will all work out" (i.e., low probability bad things will never happen to us) or putting our trust in an analog or model that predicts clear sailing.
Is there a historical analog to the present mix of causal dynamics and the potential for instability leading to to phase change / breakdown?
A strong case can be made for: the Bronze Age collapse (3000 BC); 450 to 550 AD; the 1300s and 1620 to 1660 AD.
Each period was disrupted by climate change that reduced crop yields, weakening the human populace; pandemics; depletion of once-abundant energy sources; decline of trade, money and political stability; wars; collapse of regimes, social disorder and crushing taxes as events spiraled out of the control of central authorities and the economy weakened..
But none of these eras maps neatly enough onto the present to be more than a very general guide to what tends to happen when these causal dynamics arise and start reinforcing one another.
Just as humans seek analogs and models to predict the future, we easily become overly confident in our models, our control of Nature, our technologies and in the stability of our social, political and economic orders.
There's a word for this: hubris.
A common thread running through these periods of disruption is a natural disaster (drought, flooding, earthquake, fires, tsunami, volcanic eruption, etc.) or war triggers a decline that in stabler times would have been absorbed without much systemic damage, but in these eras of thinned buffers and multiple challenges, the disaster topples dominoes throughout the status quo.
This may be the origin of the Mandate of Heaven: natural disasters portend the collapse of regimes if the rulers have become ruinously incompetent and self-serving (the two go together, of course).
This article discusses how wars are often the domino that topples empires / regimes, and how the resulting instability is unpredictable and full of risks: The Downside of Imperial Collapse.
The other manifestation of hubris that's on full display around the world is the failing leadership's substitution of narratives for actually solving knotty problems.
In other words, promote a narrative of success rather than actually solve problems.
This works until the status quo's reservoir of legitimacy has been drained. As the gap between the reality they're experiencing and the happy-story narratives widens, people lose faith in the status quo, and the narratives no longer buy time.
Solving systemic problems requires changing the entire power structure and way of doing business, and this is precisely what the status quo cannot do.
Michael Pettis explains this in his article on China, but the same dynamic plays out in every nation's status quo: changing course means hurting powerful players, and so that's not an option:
How China Trapped Itself: The CCP’s Economic Model Has Left It With Only Bad Choices.
The saying "Nature bats last" is highly applicable. We think we have the means to respond to any eventuality, but this is hubris.
Rather than seek the illusory security of an analog or model that doesn't actually map the present, our security in enhanced by embracing uncertainty and seeking to mitigate potentially catastrophic outcomes with modest investments.
By embracing uncertainty, we reduce anxiety not by putting our confidence in iffy analogs but in planning for uncertainty.
Robert Kaplan's advice in the article on Imperial Collapse is scale-invariant: it's just as applicable to households as to nations:
"Again, the key concept is to always think tragically: that is, to contemplate worst-case scenarios for every crisis, while still not allowing oneself to be immobilized into general inaction. It is more an art and a brilliant intuition than a science. Yet that is how great powers have always survived. A grand strategy of limits is crucial."
(This mirrors my book A Grand Strategy for the United States, which details a strategy of limits.)
If we make modest investments to mitigate the most consequential risks, if nothing changes, our mitigation investments are still in place and didn't cost us much.
But if the dominoes fall, then those with mitigation plans for worst-case scenarios might lose 20%, while those with no such plans may lose everything.
Embracing uncertainty by planning strategies for worst-case scenarios is peace of mind at bargain prices.
Highlights of the Blog
The Plundering Of Productive Assets (with Gordon Long, 34:52 min)
'Quiet Quitting' Isn't Just About Jobs; It's About a Crumbling Economy 10/7/22 -- 80,000 views and hundreds of comments on Zero Hedge...
We Blew It: Malinvestment and the Plundering of Productive Assets 10/4/22
Devil's Advocates are Investors' Best Friends 10/3/22
Best Thing That Happened To Me This Week
Harvested tomatoes and roasted them for a fresh pasta sauce. Okinawan spinach, stir-fried with a bit of garlic made a healthy vegetable side dish.
From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
Strokes, heart attacks, sudden deaths: Does America understand the long-term risks of catching COVID?
How China Trapped Itself: The CCP’s Economic Model Has Left It With Only Bad Choices.
The Downside of Imperial Collapse. -- I never saw articles like this in Foreign Affairs a few years ago....
The Cult of Civilization
Porous terracotta air conditioning system 'nave' uses water to cool spaces without electricity.
Iron Battery Breakthrough Could Eat Lithium’s Lunch: Iron-flow technology from ESS is being deployed at scale in the U.S. --nice, but how many hours of full-grid juice do these hold?
Futures That Work -- explains why starting with conservation is common sense--which isn't just uncommon, it's extinct....
How Bryan Lourd became one of the most powerful people in the history of Hollywood -- insider tale....
The Real Name Fallacy -- read the opposite case of what you think....
Boron Neutron Capture Therapy: A Review of Clinical Applications -- promising cancer therapy...
Gibson Les Paul Tribute vs Gibson Les Paul Studio - Side by Side Comparison (37 min) -- The Tribute is half the price of the Standard, Tribute $1200, Standard $2700...
Gibson Les Paul Tribute - Guitar Review - Is this an Authentic Les Paul? (35 min) --short answer, yes....
"A person who has remained a person and not become a thing - cannot help feeling lonely, powerless, isolated in present-day society. He cannot help doubting himself and his own convictions, if not his sanity. He cannot help suffering, even though he can experience moments of joy and clarity that are absent in the life of his "normal" contemporaries. Not rarely will he suffer from neurosis that results from the situation of a sane man living in an insane society, rather than that of the more conventional neurosis of a sick man trying to adapt himself to a sick society." Erich Fromm
Thanks for reading--
charles |
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