You are here: Home Knowledge Base Dealing with Radical Uncertainty Solutions We deal with uncertainty by abolishing it. But in what state of mind and with what consequences?
Symposium 2015

Solution for Dealing with Radical Uncertainty

The Challenge

One of Karl Popper’s key insights about human predictive capacity was that "Quite apart from the fact that we do not know the future, the future is objectively not fixed. The future is open: objecti ...

One of Karl Popper’s key insights about human predictive capacity was that "Quite apart from the fact that we do not know the future, the future is objectively not fixed. The future is open: objectively open." But most macroeconomists and finance theorists have presumed exactly the opposite. They have increasingly come to rely on internally consistent models that fully specify in advance how market participants might alter the ways in which they make decisions and how aggregate outcomes unfold over time. Models in this spirit, such as so called "rational expectations" (RE) models have not been highly effective in predicting macroeconomic outcomes. They also do poorly at accounting for the behavior of asset prices.

We deal with uncertainty by abolishing it. But in what state of mind and with what consequences?

     

    1. Popper’s remarks in the session introduction reflect two propositions.

      • There are inherent cognitive limitations to human knowledge.
      • The future is made by humans working together. It cannot be known and fixed ex ante because action is the outcome of voluntaristic or subjective action built up reflexively. We just can’t know when and how existing trends and patterns will change or how people will respond. The world is complex.


      2. Humans have embodied brains that have been designed to deal with uncertainty and complexity, based on using experience to allow rapid and automatic recognition of situations and their future implications for us, based on anticipations of threats to survival or opportunities for pleasure. Essentially we manage uncertainty by removing it—by fitting situations to an existing explanatory system and removing surprise. The theories we build about the world are part of that process—they are subjectively developed narratives that “feel true” (conviction narratives).

        • Popper pointed out that most theories are false.  For him the issue became verisimilitude—which theories seem truer than others.
        • Bruner pointed out we have two modes of knowledge in the situation—paradigmatic and narrative. They are domain specific.


                3. Model selection at every moment is Conviction Narrative Selection—i.e., a selection after  construction of a narrative that subjectively makes sense of the data, supposes the future and allows a preferred action to emerge. Selection depends on an embodied  process of cognitive and emotional appraisal within social interaction.

                4. Under uncertainty conflict and so ambivalence (simultaneous feelings for and against) are omnipresent contexts for action, moreover feedback is noisy and revision is based on experience is difficult.

                5. We can deal with uncertainty in a Divided State (DS) or in an Integrated State (IS)—which is ultimately a way of saying that we do it according to how far we can manage the anxiety that derives from imagining if our actions will go wrong and yet keep thinking and acting.

                  • Main danger is omniscience and arrogance (anti-curiosity, -K).
                  • Economic theory is dangerous. Removes the problem of uncertainty in a DS by treating conviction narratives as facts. (Asset prices, debts, liquidity are based on shared narratives)

                  Solutions

                  1. Take on board the limitations of the way we think about rationality and emotion.

                  • Understand most people are means-end rational. But what is rational for me may not be for others. (Simon—also Snower on “them”). Mentalization and Empathy versus arrogance (-K).
                  • Understand the brain is embodied. The outside world is constructed via the responses of the “internal body” (interoception), i.e., via rapid pleasure/unpleasure responses in the upper brain stem, based hard wiring and learned patterns. Thought and emotion are inherently interlinked. Cognitive solutions are emotional solutions.

                  2. Recognize the severe limits of optimization when the initial conditions for optimization rest on an implied narrative of the future. (Stuff happens).
                  3. Recognize the ubiquity of Conflict and Ambivalence in any con­flict and Ambivalence in any context of uncertainty and learn to recognize and distrust narratives supported by idealization, omniscience states, DS and Groupfeel.
                  4. Use and further develop techniques developed at UCL to measure these states in organizations, economies, etc. (See references.)

                   

                  Further Reading:
                  1. Uncertainty, Decision Science, and Policy Making: A Manifesto for a Research Agenda. David Tuckett , Antoine Mandel , Diana Mangalagiu , Allen Abramson, Jochen Hinkel , Konstantinos Katsikopoulos , Alan Kirman , Thierry Malleret , Igor Mozetic , Paul Ormerod , Robert Elliot Smith , Tommaso Venturini, and Angela Wilkinson.  Critical Review. Vol. 27, Iss. 2, 2015. http://www.tandfonline.com/action/showCitFormats?doi=10.1080%2F08913811.2015.1037078

                  2. News and narratives in financial systems: exploiting big data for systemic risk assessment. Presented at ECB Workshop on Big Data for Forecasting and statistics (Frankfurt) and the Office of Financial Research and the Cleveland Fed conference in Washington DC. (With Nyman, R; Gregory, D; Kapdia,S., Ormerod, P and Smith, R.) In press for the Bank of England Working papers series.. Available at http://risklab.fi/sra2015/papers/Nyman_et_al_paper.pdf

                  3. Tuckett, D.A and Nikolic, M., (2015) The Role of Conviction in Decision-Making  Under Deep Uncertainty. https://www.researchgate.net/publication/276376031_The_Role_of_Conviction_in_Decision-Making_Under_Deep_Uncertainty (under review)

                  4. Tuckett, D (2011) Minding the Markets: An Emotional Finance View of Financial Instability. London and New York: Palgrave Macmillan. (Translated as Die verborgenen psychologischen Dimensionen der Finanzmärkte: Eine Einführung in die Theorie der emotionalen Finanzwirtschaft. Frankfurt: Psychosozial-Verlag.)

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