Uncertainty

I’ve been thinking a lot about uncertainty recently – how it’s used in economics as jargon and how most people consider it. My own particular thoughts have focused on how people seem to avoid uncertainty, not by taking precautions for it, but by ignoring its existence. I’ve been focusing on this in the context of retirement saving, but there are certainly other fields where this should be a focus. In almost any intertemporal model, replace “hard” variables with expectations and you’ll have a much better picture of the true state of the world.

The advice I glean from this is that when thinking about the future, you can’t always plan for what particular troubles may befall you. But you can plan that some events (some good, some bad) will happen that take you off your charted course. What you can do is put yourself in a position where you’re best able to handle the inevitable bumps. It’s a variation on “the harder I work, the luckier I get.” Rather than focusing on particular outcomes, people should create the conditions where they’re most likely to experience good outcomes. And then believe that you’re capable enough to handle whatever may come.

Right on cue as I was thinking about this issue, I become aware of a new measurement (what’s measured affects the observed…) that researchers have come up with. They look at mentions of “uncertainty” in the press and plot the levels over time. It’s interesting and a key take-away is that we’re most “certain” right before some big event like September 11th or the financial crisis comes along and wakes us up: http://policyuncertainty.com/.

So perhaps all the complaining about “uncertainty” recently is a good thing (inasfar as it doesn’t lead to being overly cautious) – it keeps us focused on the state of the world as it is, rather than the certain one we wish we had.

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