Deep work and intense focus can be overrated. Or perhaps our mental bandwidth is just aging. Either way, we need to switch gears occasionally to trigger new connections and insights. So, while we’re in the process of preparing our annual letter (i.e., battling with the Instant Gratification Monkey), we thought we’d share a quick piece on “uncertainty” that has been marinating in the background for some time.
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“I was born not knowing and have only had a little time to change that here and there.”
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— Richard Feynman
Absolute certainty does not exist in the wild. Yet, on Wall Street, overconfidence is pervasive. At Broyhill, on The Blue Ridge, if there is one thing we are certain of, it is that we are always uncertain. If there is one thing that we know with confidence, it is that we know very little, and as a result, we should have little confidence.
Jason Zweig mocks the hubris of investors in his definitions of certainty and uncertainty in The Devil’s Financial Dictionary.
CERTAINTY. An imaginary state of clarity and predictability in economic and geopolitical affairs that all investors say is indispensable—even though it doesn’t exist, never has, and never will. The most fundamental attribute of financial markets is uncertainty.
UNCERTAINTY. The most fundamental fact about human life and economic activity. In the real world, uncertainty is ubiquitous; on Wall Street, it is nonexistent.
Contrast the kind of egotism found on Wall Street with the humility of the greatest minds outside of finance. We can all learn something from Richard Feynman, who freely admitted that a scientist is never certain:
“We know that all our statements are approximate statements with different degrees of certainty; that when a statement is made, the question is not whether it is true or false but rather how likely it is to be true or false.”
Investing is no different. Approximate statements and different degrees of certainty require us to think probabilistically. The question is not, “Will I be right, or will I be wrong?” The question should be, ”What is the probability of this scenario versus another, and how does this information impact my assessment of value?” We must leave room for doubt, even in our highest conviction ideas. Otherwise, we risk becoming complacent.
We must discuss each question within the uncertainties that are allowed. And as evidence grows it increases the probability perhaps that some idea is right, or decreases it. But it never makes absolutely certain one way or the other. This is of paramount importance in order to progress. We absolutely must leave room for doubt or there is no progress and there is no learning. There is no learning without having to pose a question. And a question requires doubt. People search for certainty. But there is no certainty. You only think you know, as a matter of fact. And most of your actions are based on incomplete knowledge.
Wall Street has all the answers. Investors are an overconfident bunch. Making billions does wonders for one’s ego. And clients want confidence. As a result, I’ve met very few investors who can muster up the courage to say these three words, “I don’t know.” Knowing everything makes it very hard to learn anything!
The first thing, according to Feynman, before you begin, is that you must not know the answer! We must begin by being uncertain as to what the answer is. Otherwise, how can we learn? This may sound like common sense, but sense is not so common in finance.
Not knowing is much more interesting than having incorrect answers. We must learn to live with doubt and embrace uncertainty. We don’t have all the answers, so we shouldn’t feel anxious from not knowing things. Not knowing is an opportunity to learn.
The question of doubt and uncertainty is what is necessary to begin; for if you already know the answer there is no need to gather any evidence about it.
I have approximate answers and possible beliefs and different degrees of certainty about different things, but I’m not absolutely sure of anything and there are many things I don’t know anything about.
The first source of difficulty is that it is imperative in science to doubt; it is absolutely necessary, for progress in science, to have uncertainty as a fundamental part of your inner nature. To make progress in understanding, we must remain modest and allow that we do not know. Nothing is certain or proved beyond all doubt. You investigate for curiosity, because it is unknown, not because you know the answer. And as you develop more information in the sciences, it is not that you are finding out the truth, but that you are finding out that this or that is more or less likely.
There are few absolute truths in investing. The best we can do is gather evidence to judge the likelihood of various outcomes. We do this by connecting various pieces of the puzzle and trying to put them together in a way that makes sense. We are constantly exploring. We are constantly looking for new evidence—trying to find out more about what we know and to better understand what we don’t know.
Put together ideas to try to enforce a logical consistency among the various things that you know. It is a very valuable thing to try to connect this, what you know, with that, that you know, and try to find out if they are consistent. And the more activity in the direction of trying to put together the ideas of different directions, the better it is.
After we discover the evidence we must judge the evidence. What did we learn? What does that imply for our original hypothesis? How likely is it that we are correct? Are there other factors we failed to consider that may have led to similar results or conclusions? Investors are often too anxious to jump to conclusions that support their original thinking. Confirmation bias is difficult to resist. We can learn from Feynman’s lessons on degrees of certainty.
That is, if we investigate further, we find that the statements of science are not of what is true and what is not true, but statements of what is known to different degrees of certainty: “It is very much more likely that so and so is true than that it is not true”; or “such and such is almost certain but there is still a little bit of doubt”; or, at the other extreme, “well, we really don’t know.” Every one of the concepts of science is on a scale graduated somewhere between, but at neither end of, absolute falsity or absolute truth. It is of great value to acknowledge ignorance.
Investors have a difficult time living in uncertainty. But uncertainty remains the most fundamental attribute of financial markets. Living in an imaginary world of certainty can create big problems managing money in the real world. The sooner we admit that we live in an uncertain world—that we don’t have all the answers—the sooner we can learn to think accordingly. This understanding is vital. Once accepted, it shapes our vantagepoint and becomes a habit of thought. We can learn from the scientist.
The scientist has a lot of experience with ignorance and doubt and uncertainty, and this experience is of very great importance. When a scientist doesn’t know the answer to a problem, he is ignorant. When he has a hunch as to what the result is, he is uncertain. And when he is pretty darn sure of what the result is going to be, he is in some doubt. We have found it of paramount importance that in order to progress we must recognize the ignorance and leave room for doubt. Scientific knowledge is a body of statements of varying degrees of certainty – some most unsure, some nearly sure, none absolutely certain.
Keep an eye out for our annual letter and The Broyhill Book Club in the coming weeks. Subscribe to The View from the Blue Ridge to be sure you receive it!
Source & Additional Feynman Favorites:
Article by Christopher Pavese, Broyhill Asset Management