Oct 24, 2015

Dealing with Uncertainty

I’m sure all of us have gone through the- “Will she? Or won’t she?” dilemma at some point in our lives. Ah…to be a fool in love (or as some would say needn’t mention ‘fool’).

I’ve tossed coins, played ‘flame’, tallied names, plucked petals from flowers, even stared at the moon, all in the hope for some ‘divine revelation’. Did any of it work? Well, I’ve had my fair share of both. She said ‘yes’ because the 7th toss came out heads and she said ‘no’ because of the petals in the flower.

It is an interesting habit that we all have of ’assigning superfluous reasons’ to phenomena that we don’t fully comprehend. And, the funny thing is, if for some reason we meet with success using, to put it mildly, ‘out of the box thinking’ then we tend to repeat it. For example, if the first time the ‘coin-toss’ worked then in the next adventure I would use the same system.

George Soros explains this in his “Theory of Reflexivity”. There is a part of thinking that is forever trying to ‘manipulate’ the external environment. This manipulation is of course fraught with risks because you don’t have sufficient information to make informed decisions. You judge the manipulation based on the result(s). He calls this a ‘feedback loop’. A positive feedback would mean that you would repeat and maybe even enforce the process (imagine me tossing a coin for all of life’s important decisions because it’s worked ‘so far’) and a negative feedback would mean that you suddenly doubt the validity of the action/ manipulation (imagine me looking at the coin and scratching my head). A positive feedback tends to distort reality even further whereas a negative feedback tends to bring you back to reality.

Look at it like this, if the coin-toss worked, I would continuously be tossing. I would develop a quirk to deal with uncertainty. You can almost see how religion, rituals and other dogma came in to existence because of the same system being applied by everyone.  

Well, so the ‘wiser’ me has figured that, for example, while the coin tossed in the air my heart would beat a lot harder and in the process revealing to me what my ‘true fear was’. In other words it would reveal my ‘anxiety’ to me.

Now, assume a young man in love has come to you for advice. How would you approach advising him? Remember, you’re not trying to out-guess him, you can’t. You don’t have sufficient information unless, of course, you know the young woman responsible for the poor boy’s condition. Assume that you don’t know her. Then the primary aim should be to help the young man ‘handle his anxiety’.

I would approach advising him primarily from two sources- one is an ancient Greek philosophy known as stoicism (or pessimism) and other is from a wonderful book that I recently read called “How to stop worrying and start living”-by Dale Carnegie ( I strongly recommend it).

The first step is to get the guy to understand that there is an ‘uncertainty’ and ‘accept it’. This is the most basic requirement and there can be no progress if we can’t drill this in to his head. What we have to do now is to help him ‘deal with his uncertainty’.

The next step is to understand the various outcomes (think probability in statistics). This is a straight forward case with two probabilities and we can apply a 50-50 chance to each outcome.

Now, we need to look at ways of improving the odds. Can we use evolutionary psychology, for example, in wooing the lady? Can we try poetry, gifts, singing, etc.? (Try doing direct things instead of esoteric stuff like tossing coins and picking flower petals.)

And now, this is where stoicism will come in, despite the young man’s best efforts the result could still be a negative. He needs to be prepared for that. If he can ‘accept failure’ or even if he’s aware of it then he can be better prepared for it. In management parlance they call this a Plan B. What is the plan B? It needs to be clearly defined.

This has more to it than meets the eye. Practise of stoicism is tough but it makes you tougher to handle the knocks that you’re bound to get in life. By keeping the right mental attitude (Dale Carnegie) one can then-

a.       Look forward.
b.      Create more flexibility.
c.       Play with more confidence.
d.      Have peace of mind (and handle your anxiety).

Simple right? We’ve dealt with uncertainty in 4 simple steps. Is there a corollary to this same process in the investment world? I’ll leave you with that.

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