How Investors Cope With Radical Uncertainty

Money For the Rest of Us

J. David Stein

Investing, Investing Podcast, Business, Economics, Economy

4.5 • 1.4K Ratings

🗓️ 16 January 2019

⏱️ 28 minutes

🔗️ Recording | iTunes | RSS

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Summary

#236 How heuristics, filters and reasonable stories help us cope with radical uncertainty and make investment decisions. Thanks to Netsuite and The Great Courses Plus for sponsoring the episode.

For show notes and more information on this episode click here.

[0:17] Investing is a world of radical uncertainty.
[1:57] Risk vs. uncertainty.
[6:01] Coping through the use of narrative.
[10:39] Using filters to keep ourselves from being overwhelmed.
[12:48] Staying shy of the consensus and “phantastic” objects.
[16:04] Learning to tell ourselves reasonable stories.
[17:01] Re-defining what makes a great decision.
[20:52] Each individual’s decisions influence the future economy.
[23:42] Investors aren’t alone: banks need coping mechanisms too.

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Transcript

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0:00.0	Welcome to Money for the rest of us. This is a personal finance show on Money, How It Works,
0:06.5	How to Invest It and How to Live Without Worrying About It.
0:09.4	I'm your host David Stein today as episode 236.
0:12.2	It's titled How Investors Cope with Radical Uncertainty.
0:17.3	My friend Caleb hosts the Bankster Podcast and runs to site the Centralverse at the Centralverse.
0:22.8	The podcast and site all about Central Banking.
0:26.9	They're great resources and I was on Caleb's site looking at recommended reading
0:32.2	on Central Banking and one of the books was the end of alchemy
0:35.5	Money Banking and the Future of the Global Economy.
0:38.6	It's a book by Mervyn King. He's a British Economist and served as the governor of the Bank of England from 2003 through 2013.
0:49.0	He was there during the financial crisis, working with Ben Bernanke and the other players trying to keep the financial system
0:56.5	from collapsing. But this isn't a book where he pats himself on the back on what a great job he did. This is a book about
1:02.3	coping with uncertainty. And one way
1:06.2	we don't cope is through optimization. We talked about some of the dangers of optimizing or the difficulties of doing so back in
1:15.2	episode 229 with our discussion on asset allocation and model portfolio theory here's
1:21.7	what Kings says. The language of optimization is seductive. But humans do not
1:28.4	optimize. They cope. They respond and adapt to new surroundings, new stimuli, and new challenges.
1:37.0	What are we coping with as humans?
1:40.0	With radical uncertainty, which he describes his uncertainty so profound that it is impossible
1:47.9	to represent the future in terms of noble and exhaustive list of outcomes to which we can attach probabilities.
1:57.0	We just don't know what's going to happen and he hearkens that he refers to Frank Knight, an American economist who back in 1921 talked about
2:06.8	what's the difference between risk and uncertainty and risk are things, they're
	...

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