The recent experiences from 9/11, 2008 and 2020 should clearly remind us all that the future is unknowable.  Regardless of how smart, thoughtful and experienced one may be, predicting the future is about assigning a “personal” probability to a future outcome and is nothing more than a speculation.  The challenge is that the “we-know-what-we-know” (“Known Knowns”) and “we-know-what-we-don’t-know” (“Known Unknowns”) occupy only small segments of the knowledge universe.  The segments of “we-don’t-know-what-we-don’t-know” (“Unknown Unknowns”) and “Unknowables” are far greater and more impactful to investing and decision making.  The Unknown Unknowns for any one person may fall into the Known Knowns of others and learning from such others and using the Socratic method of inquiry is essential in expanding our Known Knowns and self-awareness.  But the largest gap remains the Unknowables.

In John Kay and Mervyn King’s book, Radical Uncertainty: Decision-Making Beyond the Numbers, they posited that life is not a puzzle since there is always a way or someone has the way to solve a puzzle. It reminds me of Annie Duke’s analogy in her book, Thinking in Bets: Making Smarter Decisions When You Don’t Have All.  She opined that many think of decision making as a chess game, but in reality, life is much less predictable than a chess game where every move or countermove has been mapped out and is knowable.  She suggests that life is more like playing poker where the well laid out and thoughtful process in deriving a decision can still result in a poor outcome because of the uncontrollable variability of “luck”.  Kay and King suggest that life is more like a mystery where the outcome is radically uncertain because of the effects of Unknown Unknowns and Unknowables.

The Nature magazine January 13, 2021 article on COVID mutation states that researchers have identified thousands of mutations in SARS-CoV-2 samples, but the vast majority are unlikely to have much effect on the virus’s biology. But a handful of mutations to SARS-CoV-2 can help it to escape the immune response mounted by a subset of infected people.  According to WebMd, at least one new “super strain” of the virus is already in the U.S. Another highly contagious strain from South Africa could be on its way. The strains are about 50% more contagious than the virus that has been most widely circulating in the U.S., though it doesn’t seem to be more fatal for any one person who catches it. Mutation is part of nature and is a Known Unknown.  We need to be vigilant in testing, tracing, cooperation and research in an attempt to guard against such mutated variants timely.   If there is no new COVID mutated strain that can be defended by current vaccines, we don’t expect to be back to normal at the earliest in October. But there is no certainty of this.  We have never left a radically uncertain world even with all the technological advancements and we should remind ourselves the natural human bias or intuitive preference is for stability and blind to our blind spots for randomness.  We function best when we believe the world is predictable since the reality of uncertainty adds significant stress to our daily living that we become unproductive and even cease to function.

With the realization that investment, as in life, is not a puzzle or chess, that has a manageable outcome, the only prudent approach to investment decisions is to be agile (respond to new knowns), inquisitive (make unknowns known,) and anticipate downside surprise (guard against unknowables).

Click here to read the full commentary.