One of the most common statements since the outbreak of the coronavirus pandemic is that the economic and market outlook has become more uncertain. Given that the future is inherently difficult to predict with any level of confidence and we are generally terrible forecasters can it really be true that the world is now more uncertain?
The environment unquestionably feels more unstable. There are a range of imponderables around the development of the virus itself that none of us can hope to anticipate. From the potential of a ‘second wave’ to the production of a viable vaccine. We have also experienced an unprecedented economic ‘stop’, and credible cases can be made for an inflationary or deflationary future.
Yet before accepting the ‘greater uncertainty’ idea at face value, it is worth deconstructing the meaning of such a claim. What we are really saying is:
“I was much more confident in predicting the future of the economy and financial markets before that unexpected event occurred”.
Which can be expanded to:
“I was much more confident in predicting the future of the economy and financial markets before that unexpected event occurred, and showed that my level of certainty was exaggerated.”
It seems paradoxical to suggest that things were more certain before something we hadn’t expected happened and upended our prior beliefs.
When we say things are now more uncertain we are usually implying that something has altered which has meant that the future has become increasingly difficult to predict. It has not. It was unpredictable before and it remains unpredictable now. Rather than making the world more uncertain, unanticipated events serve to show us that we were understating how uncertain things were before. When claiming greater uncertainty in the future, we actually get it backwards.
Although we should not conflate greater uncertainty with changes in the forecastability of the world, this does not mean that the notion is meaningless; it just needs to be considered in a different way. What we perceive to be an increase in uncertainty is really a change in the frame through which we view the world. We have taken a particular path and now face a different distribution of possible outcomes.
Let’s take a simple example. My range of potential future personal outcomes involves me losing my job tomorrow. This is (hopefully) a tail risk, yet it is a possibility. If I am made redundant tomorrow then my life has taken that specific course. My future is still unknowable, but the routes and their likelihood from this starting point have changed. Although it feels like my life is more uncertain now I am without a job or salary, it is nonsensical to suggest that my life was more certain before it was struck by a remote risk that I failed to predict.
If my life following a job loss hasn’t become more uncertain, then what has it become? More fragile. When we discuss greater uncertainty following a particular event, we often focus on how the shock has left us more vulnerable to future negative events. Since losing my job I am now more susceptible to failing to pay my mortgage and losing my house. There are a range of unpleasant scenarios that are now more likely. This is the same for many businesses through the current recession. The probability of ruin has changed. Our certainty in predicting the future hasn’t.
The perception of greater uncertainty is not just about fragility, but how we make sense of the world. When we perceive a sharp rise in uncertainty it is a case of the narratives we use to explain the world becoming untethered. The cause and effect stories we weave help give us some comfort navigating the randomness and chaotic nature of life. If there is an occurrence that dramatically alters the environment then the threads that hold together our own explanatory narratives quickly break apart.
The world has not become any harder to predict, but rather the stories we previously used to explain it are no longer valid. If we cannot construct a coherent narrative things begin to feel distinctly uncomfortable. To address this we will create new stories, or simply adjust our previous ones. Restoring our prior (misplaced) sense of confidence and control
The very occurrence of the coronavirus pandemic means that any certainty we may have held before was unfounded. We never know what will happen tomorrow. We should act accordingly.