Radical Uncertainty: Making decisions when so much is unknown

Radical Uncertainty, Decision-making for an Unknowable Future

Author: John Kay and Mervyn King

ISBN-13: 978-1408712603

Publisher: The Bridge Street Press

Guideline Price: £25

That the State would be paying a large share of the wages for many employers would have been nearly inconceivable only a few weeks ago.

When considering the huge decision to do so, as Minister for Finance I posed many questions about this virus and our economy. Many of them could not be answered. However, these answers were not just unavailable to Ministers and civil servants in Ireland, they were not available to our counterparts anywhere in the world.

It was not that the information was not available. At that point, the information did not exist.

Decision making is not about making optimal choices, it is instead about decisions that cope effectively with radical uncertainty

And time was of the essence. The viability of many employers was now threatened. Other countries were making announcements, but detail was very scant. But a decision had to be made. Judgment, trust and experience were used.

Peering into an uncertain future, making predictions and decisions is an essential dimension of the human condition. And always has been.

Understanding the frequency of deaths from horse kicks in the Prussian army between 1875 and 1894 heralded an important development in the understanding of uncertainty. A Russian statistician, Ladislaus Bortkiewicz, concluded that there was less than one death a year from horse kicks and no deaths only one year in two. This analysis allowed a prediction of individual deaths by year for each army corps.

This was “a life-changing revelation of the potential of social science. Even the most banal of human affairs could, it seemed, be addressed by the methods of science; the vagaries of the Greek gods had been tamed.”

This observation is made by John Kay and Mervyn King in their new work, Radical Uncertainty: Decision-making for an Unknowable Future.

The experience of both authors makes them well qualified for this most timely of publications.Kay is a prominent economist and financial journalist. The author of the exceptional The Truth About Markets (2003), a theme of his professional life ha s been understanding the functioning of markets and their consequences for societies. King was governor of the Bank of England during the great financial crash and is now a professor of economics.

The difference between risk and uncertainty is the theme of this work. Applying the same techniques to understanding both, and the gentle slide into an unjustified sense of understanding and confidence about complex decisions, can be the fatal flaw for significant decisions.

Risk can be defined by probabilities. The calculation of likelihood can be based on past experience and modelling based on the examination of information. Uncertainty cannot be defined by probabilities. This is because enough information about an uncertain event simply does not exist or cannot be known.

A false equivalence has developed over these two different concepts. The authors note that “...over the last century, economists have attempted to elide that historic distinction between risk and uncertainty, and to apply probabilities to every instance of our imperfect knowledge of the future”.

This is developed by the difference between a mystery and a puzzle. A mystery can be difficult to clearly define, the parameters can change over time, with an objectively correct solution rarely possible. In contrast, puzzles can be solved. Even when the correct answer is not obvious, it does exist and a solution can be found.

The relevance to the dilemmas of today is apparent when Kay and King observe in an early chapter that “The Black Death will not recur…and a significant outbreak of cholera in a developed country is highly unlikely. But we must expect to be hit by an epidemic of an infectious disease resulting from a virus which does not yet exist”.

Future editions of this book might elaborate on this likelihood having come to pass and our experience of dealing with it.

This, and other examples, leads to the development of radical uncertainty. This describes the range of possibilities between improbable but possible events, and events that are currently unimaginable. The future is unknowable, consequences are unpredictable.

The authors tell the story of how risk was understood and measured by probabilities.

Cromwell

An early contributor was William Petty, who successfully surveyed Ireland for Oliver Cromwell in 1656. His reward was 30,000 acres in Kenmare. Petty’s career included working with the English cloth merchant John Graunt to analyse the spread of plague in London. Accurate understanding of historical trends led to measurable predictions.

This contributed to the concept of rationality in decision making, but it was over-developed in economics, losing contact with the real world it was meant to understand.

Assuming that humans can process all information constantly and rationally led to economic models that “do not describe the world as it is, and fail to help us understand depressions and financial crises”. Decision making is not about making optimal choices, but about decisions that cope effectively with radical uncertainty.

Economists, the authors contend, should have more specific – even humble – aspirations: “the role of the economist, like that of any other social scientists, is to frame the economic and social issues that political and business leaders face when confronted by radical uncertainty”.

This resonates with the description of recent Nobel Prize-winning economists Abhijit Banerjee and Esther Duflo,  who described the need for economists to be “plumbers”, solving practical problems through use of data, judgment and luck.

The conclusion of this book argues that uncertainty should be embraced. It cannot be accurately measured, so it cannot be eliminated.

Collective effort is essential, successful coping is possible when creativity is pooled and ideas are refined through communication with others. Stories, and the development of collective narratives, can provide reference points for individuals and communities. Models can help, but it is crucial to appreciate their inherent limitations.

The authors approvingly quote a philosopher who warns that “the map is not the territory”.

This is an elegant, wise and timely book. It reminds us of the value of that which we cannot measure or quantify. It does not offer easy solutions for eliminating uncertainty or for clearly seeing into the future. But, is that not the very point?

Paschal Donohoe is the Minister for Finance, Public Expenditure and Reform.