28th September 2010
Is the world getting more uncertain, or less uncertain?
I've by now attended a few expert sessions where I hear that uncertainty is increasing in the modern world. For instance this report talks about an "increasingly uncertain global environment", and that "The complexity and uncertainty that the public sector faces is driving the need for governments to foster agility in its people, systems and outlook."
I agree that complexity is increasing, even as things look increasingly simper on the surface because of a more sophisticated way of using technology (a good example would be the I-Phone). Also, of course, things are getting more complicated – which is a subset of complexity (consider modern cars compared with earlier cars).
But I can't find evidence that uncertainty is increasing. On the contrary, I find uncertainty is decreasing.
Let's use the Rumsfeld framework to determine the extent of our knowledge (or ignorance):
1. known knowns: This is the situation of perfect information.
2. known unknowns: In this case we may know the distribution of something (say in the game of dice), but don't know precisely which outcome we will experience. So there is a level of known risk with well-defined probabilities.
3. unknown unknowns: This refers primarily to Black Swan events that hit us from the blue. We neither know their mean, nor distribution. We don't even know that they exist!
The question before us is: Are (2) and (3) increasing? Are uncertain events increasing? Are shocks and accidents increasing?
Consider this graph from my draft manuscript DOF.
As knowledge about the world has grown our ignorance has reduced.
To the hunter-gatherer, life was almost entirely uncertain. He did not know whether he'd find food on a given day, how far and in which direction he'd have to go to find food, whether he would return home safe, whether his wife would still be at home when he returned or have been picked up in a neighbouring tribal raid, whether his child would live or die of disease, snakebite, and so on. Life was a mystery. Survival was a herculean challenge. The savage knew virtually nothing. Almost everything was an unknown unknown.
In that sense certainty has dramatically increased. We get up at a fixed time. Immediately, hot water and food are available. We go to work in a bus (in my case) that might be five minutes late, but the thing still comes! We might see a traffic accident on the way once in a year but generally everyone reaches safely to work. Our families are generally safe, our children don't mosly die of disease. And so on.
We know almost exactly what we know and what we don't know. What we don't know we can find on google.
The area of the unknown unknown has shrunk to almost total insignificance. Black swan events that are largely man-made (e.g. GFC) can be readily explained by those who know, and will confound those who are ignorant about how markets work. The fact that some people don't understand freedom and free markets doesn't mean that the event was not predictable.
True, we do a lot many more things than we did in the past. Therefore the things that can change have increased. So there are more 'distributions' today – that were not even in existence in our hunter-gathering days – many of which are not fully known.
But despite that, on average, on all things that matter, life is FAR MORE certain than it was ever before.
Ways by which uncertainty is reduced in the modern world:
– Hedging of risks (typically foreign exchange risk).
– Diversification of one's portfolio
– Insurance and risk management
– Complete markets including for insurance (although insurance markets will never be complete)
– Predictable regulatory frameworks
– Systematic governance arrangements (both in the public and private sectors) including accounting and other practices.
– continuous improvement in health technology and science
As competition has increased (relatively to our hunter-gathering days? – not sure) people's jobs are not assured. But it is still assured that they will survive longer and healthier than hunter-gatherers or pre-modern men.
Even if a major glitch occurs (e.g. the Virgin Blue breakdown of computers yesterday), the net loss is relatively small, since individually, these things account for an increasingly smaller share of our income.