Radical Uncertainty: Decision-Making Beyond the Numbers

by John Kay, Mervyn King

Overview

Much economic advice is bogus quantification, warn two leading experts in this essential book, now with a preface on COVID-19. Invented numbers offer a false sense of security; we need instead robust narratives that give us the confidence to manage uncertainty.

“An elegant and careful guide to thinking about personal and social economics, especially in a time of uncertainty. The timing is impeccable." — Christine Kenneally, New York Times Book Review

Some uncertainties are resolvable. The insurance industry’s actuarial tables and the gambler’s roulette wheel both yield to the tools of probability theory. Most situations in life, however, involve a deeper kind of uncertainty, a radical uncertainty for which historical data provide no useful guidance to future outcomes. Radical uncertainty concerns events whose determinants are insufficiently understood for probabilities to be known or forecasting possible. Before President Barack Obama made the fateful decision to send in the Navy Seals, his advisers offered him wildly divergent estimates of the odds that Osama bin Laden would be in the Abbottabad compound. In 2000, no one—not least Steve Jobs—knew what a smartphone was; how could anyone have predicted how many would be sold in 2020? And financial advisers who confidently provide the information required in the standard retirement planning package—what will interest rates, the cost of living, and your state of health be in 2050?—demonstrate only that their advice is worthless.

The limits of certainty demonstrate the power of human judgment over artificial intelligence. In most critical decisions there can be no forecasts or probability distributions on which we might sensibly rely. Instead of inventing numbers to fill the gaps in our knowledge, we should adopt business, political, and personal strategies that will be robust to alternative futures and resilient to unpredictable events. Within the security of such a robust and resilient reference narrative, uncertainty can be embraced, because it is the source of creativity, excitement, and profit.

Product Details

ISBN-13:	9780393541984
Publisher:	Norton, W. W. & Company, Inc.
Publication date:	09/07/2021
Pages:	572
Sales rank:	197,351
Product dimensions:	5.40(w) x 7.70(h) x 1.50(d)

About the Author

John Kay is an economist and Fellow of St. John’s College, University of Oxford.

Mervyn King, former governor of the Bank of England, teaches at New York University and the London School of Economics.

Table of Contents

Acknowledgements xiii

Preface to the Paperback Edition xv

Preface xxxiii

Part I Introduction: The Nature of Uncertainty

1 The Unknowable Future 3

2 Puzzles and Mysteries 18

3 Radical Uncertainty is Everywhere 35

Part II The Lure of Probabilities

4 Thinking with Probabilities 53

5 A Forgotten Dispute 69

6 Ambiguity and Vagueness 85

7 Probability and Optimisation 106

Part III Making Sense of Uncertainty

8 Rationality in a Large World 133

9 Evolution and Decision-Making 154

10 The Narrative Paradigm 178

11 Uncertainty, Probability and the Law 196

12 Good and Bad Narratives 215

13 Telling Stories Through Numbers 232

14 Telling Stories Through Models 248

15 Rationality and Communication 262

16 Challenging Narratives 278

Part IV Economics and Uncertainty

17 The World of Finance 303

18 Radical Uncertainty, Insurance and Investment 322

19 (Mis)Understanding Macroeconomics 338

20 The Use and Misuse of Models 358

Part V Living with Uncertainty

21 Practical Knowledge 381

22 Adapting to Radical Uncertainty 402

23 Embracing Uncertainty 418

Appendix: Axioms of Choice under Uncertainty 435

Notes 445

Bibliography 471

Further Reading 511

Index 514

Editorial Reviews

"Many books will make a reader better informed or smarter. This is one of very few that will make a reader much wiser. You will live differently and better after you grasp Kay and King’s seminal lessons about radical uncertainty."

Lawrence H. Summers

"In this profound yet practical book, Kay and King admit the obvious—that in crucial domains, we do not, will not, cannot know what is going on—and show, nevertheless, how to retain the ability to function."

Paul Romer

"John Kay and Mervyn King want more people to grasp the old distinction between risk and uncertainty forgotten by a later generation of economists. Too many of life’s uncertainties are presented to us as if they are calculable risks, especially in the realm of finance. We should focus on the truly calculable risks, they argue, and stop pretending we can predict situations of radical uncertainty."

Niall Ferguson

"Rarely is a book’s publication as well-timed as John Kay and Mervyn King’s Radical Uncertainty: Decision-Making Beyond the Numbers."

Wall Street Journal - Joseph C. Sternberg

"An elegant and careful guide to thinking about personal and social economics, especially in a time of uncertainty. The timing is impeccable."

New York Times Book Review - Christine Kenneally

Kay and King…tell diverse and fascinating stories about corporate culture, the inequitable remuneration of chief executives, the hunt for Osama bin Laden, the manufacturers of the Airbus, NASA and the traffic app Waze. Their book is demanding, and at times difficult, but it is also an elegant and careful guide to thinking about personal and social economics, especially in a time of uncertainty.

The New York Times Book Review - Christine Kenneally

02/10/2020

British economists Kay and King (The British Tax System) criticize the quantitative direction of modern economic science in this witty yet overstuffed account. Arguing that people “cannot possibly assess the consequences of all conceivable choices,” Kay and King take behavioral economists such as Daniel Kahneman to task for dismissing humans’ cognitive mechanisms as biased or irrational. Hypothetical models and probabilistic thinking, the authors contend, fail to account for the “radical uncertainty” of the real world. They advocate for “the value of simple heuristics, or rules of thumb,” and highlight the central role that narratives and contextual reasoning play in decision making. Kay and King use numerous anecdotes to back up their claims, including President Obama’s 2011 decision to authorize the raid on Osama bin Laden’s hideout in Pakistan, the 2008 financial crisis, and the experiences of business tycoons including Warren Buffett and Steve Jobs. Though readers will appreciate the authors’ dry sense of humor and flare for thumbing their noses at academic peers, the book’s repetitions and overreliance on anecdotes (some of them fictional) undercut its central arguments. Even dedicated students of economics who are open to Kay and King’s perspective will find their patience tested by this dense call for reform. (Mar.)

Publishers Weekly

"An elegant and careful guide to thinking about personal and social economics, especially in a time of uncertainty. The timing is impeccable."

Christine Kenneally

03/06/2020

This illuminating work presents compelling arguments about the distinction between the concepts of risk and uncertainty, and the impact of both on modern finance, economics, and decision-making. Financial and economic risks often are calculated, and future risks are predicted, using various mathematical methods, especially probabilistic distributions. Uncertainty is defined as information that is unknown. Economists Kay (fellow, St John's Coll., Oxford; Other People's Money: The Real Business of Finance) and King (Stern Sch. of Business, New York Univ.; The End of Alchemy: Money, Banking, and the Future of the Global Economy) show how radical uncertainty stems from the economic idea of Knightian uncertainty, in which there is a lack of quantifiable knowledge. These radical uncertainties are associated with a lack of information; therefore, they cannot be measured or calculated. The authors recommend using narratives and other qualitative methods to make well-informed decisions, and they use several historical anecdotes across industries and institutions to support their assertions. VERDICT This informative book will appeal to readers wishing to delve further into the processes of modern finance and economic forecasts.—Caroline Geck, Somerset, NJ

Library Journal

2019-12-08
What do we know about the way economies work? According to two British economists, less than we think.

As Donald Rumsfeld once observed, there are known knowns, known unknowns, and unknown unknowns, a vexation for the smartest strategist. Kay and King (The British Tax System, 1978) employ a like notion here: Although in economics there is a neat little concept called "perfect information," and although pricing is assumed to incorporate shared knowledge, the governing principle of the real world is uncertainty—and most of the time, we don't know what we don't know. This "radical uncertainty" means that our understanding of the present is incomplete and of the future, even more fragmentary, meaning that economists are forced to rely on something akin to hunches. They must explain by way of "narrative reasoning…the most powerful mechanism for organizing our imperfect knowledge," creating stories about the world that incorporate our experiences, the experiences of others, and such reliable data as we are able to assemble in a "world of uncertain futures and unpredictable consequences." A repeated example throughout the book is the probabilistic assessment Barack Obama received when determining whether to launch the raid that killed Osama bin Laden: It wasn't 100% sure that bin Laden was in that Pakistani compound, and a botched operation might have meant war. That things worked out as they did was by no means guaranteed, and neither is following the rules of economics: Supply and demand is a powerful explanatory tool, but it explains only so much about how people and markets behave. While a sophisticated knowledge of economic concepts is a desideratum for following the authors' argument closely, many of their takeaways don't require much expertise. "Never rely on data without asking ‘What is the source of this information?' " they counsel, helpfully, one of many dicta to help overcome the shadowy unknowns that elude us even with the benefit of hindsight, such as why recessions hit when they do.

A powerful way of looking at the market, of much use to investors and strategists.

Kirkus Reviews