Jul

15

We often hear from the media of some financial analyst saying "there is some uncertainty with that situation. …". It is quite obvious that they are telling investors to hold back with their money. Uncertainty is always bad, as the majority of the people always say.

How does one really deal with it? Is there any certainty in anything really? Seasoned investors generally would say "we are not talking about certainties, we are dealing with probabilities". Then how does one decide on investing based on probabilities? A general way of dealing with probabilities for instance would be when "there is a 70% chance of that happening" (I know, there is the concept also with expectations, but for the simplicity of this discussion, let's disregard it now as it is not that relevant here). It sounds very good. But the question then comes "are you certain that there is 70% chance of that happening?". To that, one perhaps would answer "there is 70% chance that there is 70% chance of that happening". Well, it sounds not too bad either. But why stop here? One could keep asking "are you certain that …". As it goes on, the answer becomes "there is 70% times 70% times 70% times … times 70% chance of that happening". When getting to the infinite loop, it becomes ZERO percent chance of that happening.

So it sounds that even one dealing with probabilities would invest on something when there is 0% certainty or 100% uncertainty.

What is going on here? Does one's reasoning matter at all in making decisions? How then really should one decide?


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  1. bo keeley on July 16, 2012 9:35 am

    My life chapters as a hobo and explorer have the constant of uncertainty at every bend with the solutions of probability. When you are tempted to latch onto a moving ladder of a freight car, or to duck or appear taller to a charging bear, there is one big difference that separates the men from the boys, the quick and the dead. Solving probability equations under the pressure of time is a different game than without a clock ticking. Usually there are about three seconds to react in a hobo or survival situation, and in that long expanse for most people the pressure during each tick grows exponentially until the probability equation for the stressed brain becomes impossible to solve. However, the cool survivor waits until the start of the last tick before reacting to the brain´s probability solution with the greatest certainty. The same applies in racquet sports and chess using a time clock.

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