I started 2020 intending to read 50 books. Most will be business books with a few works of fiction rolled in. At present, I am reading “Radical Uncertainty: Decision-Making Beyond the Numbers” by John Kay & Mervyn King. The later author was the Bank of England Governor during the financial crisis in 2007-2008 and the subsequent Great Recession. The timing could not have been better given the present pandemic. Or, I just see connections because of what I am reading at present. You can decide after reading this article.
“The title of this book, and its central concept, is radical uncertainty. Uncertainty is the result of our incomplete knowledge of the world, or about the connection between our present actions and their future outcomes.”
During this pandemic, people are juggling short term issues – did the tenant pay the rent, how to maintain social distancing, home-schooling or shopping for essentials. Then there is the long-term planning mostly tied to what life will look like after the lockdown. For the property community, the central question about the future revolves around house prices and the implied values for existing investments, interest rates and what other property investors are planning. Some individuals see inflation coming given the government support programs. Others see house prices crashing because the economy has stopped working. Others argue that not much will change in terms of the need for housing yet what people want in a house might change as we embrace working from home, long term. There are implications for office investments and retail shops if work patterns change.
There is no clear understanding of how things will settle. Life is very uncertain. We are in a period when uncertainty is spiking. Other than ‘keep calm and carry on’, it is hard to know what to say. The present time is a clear example of the uncertainty covered in the book. Radical uncertainty makes it very clear that the right action is to ask one question and to engage others in the conversation. To quote from the book, “…with radical uncertainty we try to form a coherent and credible answer to the question 'What is going on here?’" More on this later. First, back to the theory.
Economist produce economic models to explain what has gone on and what the future will be. A way to anticipate the future through a story about the past. The models’ bake in assumptions’ for what is essential or what is considered normal. The key to any good model is it reduces the amount of information included to only that which is necessary to predict. Models would be too big and unwieldy if they tried to include all the data and factors in the real world. The history of WWII, a six-year global event, fits into one book you can read in a matter of days so you can understand the ‘event’ without having to live through it. The detail is lost. The events that are assumed are not essential.