Value, Growth and the Limits of Our Investment Knowledge Taming the Uncertainty Monster

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Meet the monster

“Doubt is not a pleasant condition, but certainty is absurd.”


There are people in the investment community who claim to know things with a level of certainty that is unjustified. They develop rules-based investment strategies grounded in their views about “how things work.” Yet their strategies fail to recognize the complex and dynamic nature of the financial markets, undermine the credibility of our industry and, ultimately, could harm clients.

Investing is not a hard science. Water freezes at 32 degrees. Hot air rises. Throw a ball in the air and it falls back to Earth. In the hard sciences, there are rules that always apply.

Investing involves putting your money at risk in one of many markets – stocks, bonds, real estate, commodities, art or rare coins. All of them are complex systems driven by the collective behavior of millions of human beings. They reflect our rational nature, our emotional nature and our ability to learn from the past and adapt to what we learn.

It is extraordinarily difficult to develop hard and fast rules about how markets will behave. We don’t know what events will unfold or how investors will react to them. We don’t know how fear and greed will manifest themselves. We don’t know what lessons people will draw from the past or how they will change their behavior to take those lessons into account.

We can develop guidelines based on our observations about the past, but in the investment world there are few equivalents to “water freezes at 32 degrees.” All investment decisions involve an element of uncertainty.

No matter how hard we try, we can’t make it go away.

Environmental scientists have a similar problem. Their task is to study and understand the behavior of another enormously complex system and make recommendations to policymakers whose job it is to save the world. They study the environment with all the tools available to modern scientists. They use their immense computing power to develop models that attempt to simulate reality. They run scenarios. They calculate probabilities. They propose theories. Still, they do not fully understand the environment and cannot reliably predict its behavior.

Professor Jeroen van der Sluijs of Utrecht University in the Netherlands coined the term “uncertainty monster” to describe how the scientific community responds to the uncertainties that arise from the study of the environment. He borrowed the monster metaphor from Dutch philosopher of technology, Martijntje Smits. Georgia Tech professor and climate scientist Judith Curry popularized the uncertainty monster concept in this country.

The uncertainty monster inhabits our world just as it does the world of environmental science.

Uncertainty, itself, is not the monster. The monster is within us. It raises its head whenever we try to deny uncertainty, disguise it, contain it or hide it from view.

The monster is dangerous. It leads us to believe we have figured things out, know the rules and can relax. It causes us to be confident when we should be cautious. It creates blind spots. It causes us to act mindlessly when we believe we are acting prudently.

Ultimately, the monster harms our clients because it causes us to communicate untruthfully and set expectations inappropriately. It raises false hopes. It undermines trust – the foundation of all relationships. The advice we give becomes mechanical rather than thoughtful.