Revisiting the Uncertainty Trope

Back in November 2010, I penned a piece for Bloomberg about the absurd meme circulating regarding the impact of Uncertainty.

The key point was that uncertainty was an essential part of markets, and indeed life. The future is by definition unknowable and therefore uncertain. Those who complained about it revealed how little they actually understood about not just investing, but the human experience:

“Could markets function without uncertainty? It takes only a little thought to realize that markets actually thrive on doubt, imperfect information and a lack of consensus.

Uncertainty drives the market’s price-discovery mechanism. Investing requires there to be differences of opinion. When there is broad agreement as to an asset’s fair value, trading volume falls. Without any uncertainty, who would take the opposite side of your trade?

History teaches that whenever the opposite occurs — when certainty overwhelms uncertainty — the herd tends to be wrong. In rare instances, when there is a near-total lack of uncertainty in the market, the outcome is usually a spectacular disaster.

Think of the false certainty surrounding the peak of the dot com bubble (profits don’t matter!), or the nadir in March 2009 (the abyss awaits!) to validate just how true this is.

Since then, the uncertainty trope has become the general catchall for explaining (or mis-explaining) a variety of future events.  The list of uncertainties are long:  The fiscal cliff, US tax policy, US health care laws, what happens in Greece, will we have a recession next year or not, is Housing recovering, what happens to the Eurozone, with the Euro currency collapse, what about the US elections?

I do not recall anyone saying investing was difficult do to the uncertainty caused by a potential nuclear conflagration between the US and USSR during the Cold War. Is the Greek situation today more dire and uncertain than the policy of MAD — mutual assured destruction — ever was ?

Regardless, all of these unknown events will get resolved one way or another a some point in the future. Which is, of course, how all ambiguities eventually get resolved — at some future date unknown. That is why the uncertainty claim is so absurdist. The lack of understanding today of an unknowable future ALWAYS gets revealed as the future becomes known to us.

This is how things unfold in a linear timeline.

It finally dawned on me what the uncertainty trope is all about. It took a conversation with a nervous CEO to reveal it, but believe I teased out the answer.

Most of the time, Humans exist in a happy little bubble of self-created delusion. We lie to ourselves constantly. We rationalize everything we do, past and present. We engage in selective perception, seeing only the things that agree with us.  Our selective retention retains the good stuff and disregards most of the rest. In the mind’s eye, we are all younger, better looking, slimmer, with more hair than the camera reveals.

In short, we create a reality construct that bear only passing resemblance to the objective universe.

The Uncertainty trope arises during those moments when our delusions fade. In those instances where we recognize our own permanent ignorance of the future. We are not so happy with the naked truth and prefer the comfortable lie. These brief instances where the facade fades, the curtain gets pulled back, the ugly reality becomes known to us. We get a glimmer of understanding our own lack of understanding. That’s when the grim reality of the human condition is revealed — and it scares the hell out of us.

The next time you hear someone mention Uncertainty, ask yourself this: How much less do they actually know about the future today versus what they knew last week or year? How less do they think they know?

The uncertainty trope arises not when things are uncertain — they ALWAYS are uncertain. Rather, it comes up during those all too rare instances when we mortals briefly acknowledge reality. When it passes, we all manage to go back to our previously constructed artificial reality.

This Matrix choice of choosing the red pill or the blue pill is a Hollywood fantasy. In the real world, the Blue pill dominates. You can take the Red pill, but for most of humanity, the reveal lasts only a very brief period. The blue pill, the one of the comfortable fantasy, eventually reasserts itself.

Your construct beckons . . .

Previously:
Kiss Your Assets Goodbye When Certainty Reigns
By Barry Ritholtz – Nov 9, 2010 9:00 PM ET 
http://www.bloomberg.com/news/2010-11-10/kiss-your-assets-goodbye-if-certainty-reigns-commentary-by-barry-ritholtz.html