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Below is a first guest article on Paper Alfa. I have asked a few good friends to see whether they can contribute and share some of their knowledge with my subscribers. The subject was totally left to them. My dear friend Pan did not shy away and surprised me with a great piece, one easy-forgotten element, not only in investing but also in general life. Dealing with uncertainty and decision-making under those very conditions. For some of us, this comes easy; for others, it’s a real struggle.
In an ever-changing world, individuals and organizations must frequently make decisions with incomplete information. Uncertainty, a persistent shadow in the realm of decision-making, complicates the process of choosing one course of action over another. Yet, making effective decisions under uncertainty is a crucial skill, whether in business, health, public policy, or personal life.
I am grateful for his real-life experience and the personal stories he chose to share with us all today.
The Ear, Nose and Throat Doctor
I attended a training seminar, and the lead trainer asked if there was a doctor among us. An elderly gentleman raised his hand. The trainer, Rob, asked for his name and his specialism.
As you might have guessed from the title, his specialism was ear, nose and throat.
“How long have you been working in your field?” Rob asked.
“About forty years”, came the reply.
“Thank you, doctor, please take a seat. I have some questions for the class, and then I will call on you again,” Rob said.
“So guys, we have a very experienced doctor who has worked in his field for forty years. How much do you think that he knows about the ear, nose and throat?”.
There was some discussion, and by a show of hands, the class voted that he must know around 80% of what there was to know about his field.
As a side note, no one in the class voted for a number less than 60%.
Rob came back to the doctor and asked him the same question. How much did the doctor think he knew about the field to which he had devoted most of his life?
“No more than 5%”, answered the doctor, “and even then, I am probably being a tad overconfident.
So what does this mean?
For me, it raises a number of questions which lie under the title of decision-making under conditions of uncertainty.
The first one comes from Donald Rumsfeld and Nicolas Taleb and deals with blindspots.
Things that we are unaware that we are ignorant about. Let's call this class of data information outside the curriculum.
It’s there, it exists, but we haven’t been taught it, and we won’t be tested on it.
This class of information is everything that could be known about a subject, and the doctor was looking at this universe of information when he made his guess.
The rest of the class was thinking in terms of the curriculum and how much the doctor knew of the things that had been taught.
The difference between these two guesses gives rise to the saying: “The more I learn, the less I know.” This is another way of saying that the more I learn, the less certain I am of how much there is to know.
To my mind, this means that no one really knows anything; at best, they might know a small subsection of what there is to know.
Now, to be clear, I am not saying that experts have nothing to offer, but we take a big risk if we start to outsource our decision-making to them.
Can you separate your professional opinion from your personal bias, and who suffers the cost of your mistakes?
In other words, what incentives are the experts operating under?
Last year, my father passed away. He had a good, long life by his own reckoning and was ready to go. I thought I was prepared, but I was not ready for the hole of gratitude that his passing left.
Personal trauma aside, my dad had vascular dementia, which I am led to understand means that his heart was not pumping enough blood to his brain. The dementia part had to do with the brain not receiving enough oxygen.
Given his condition, he was attended to by a neurologist and a heart specialist.
Before subcontracting health decisions to specialists, we need to know the incentives that guide them. Broadly speaking, doctors are tasked with preserving the quantity of life. Probably because this metric is easy to measure, they get measured to help us live longer, which is a good thing since most of us fear what is behind the veil.
The choice that our doctor cannot make for us is whether the quantity or the quality of life is of greater value.
If we choose to outsource this decision to our doctor, we might end up with an outcome that we don’t want or like.
In my dad’s case, the situation was even more nuanced as the neurologist was concerned with the quantity of life of the brain and the heart specialist with the quantity of life of the heart. The two goals were not always in alignment, and he was prescribed meds that counteracted each other.
At the end of the day, when an expert gives their opinion, they don’t always have to live with the consequences of it. In the case of doctors, the patient always carries the cost.
Blindly trusting the advice of experts has some payoffs. We don’t get to be wrong; we were following advice.
What can we do to make better decisions under conditions of uncertainty?
Do your research, check both extremes in the debate and look for vested interests. Which side of the debate makes money by peddling its story?
Understand our incentives and those which might affect the experts. Choose an expert whose incentives are aligned with our own.
Good luck out there; it’s more fun when your eyes are open, and remember, opinions are like assholes; everyone has at least one.
Decision Making under Conditions of Uncertainty
I always appreciate real world reminders of the importance of true humility. Well done.