The coronavirus pandemic engendered a global financial meltdown orders of magnitude greater than the 2007-2008 debacle. But the two share a fundamental feature: uncertainty.
The first question is, “what if we’re wrong?” The second, larger question is, “what if we can’t know?”
Last time around I was still consulting in the financial services area, and one of the enormous issues was the valuation of securities. The upheaval in the markets made it problematic to assign values to certain classes of securities, and valuing those securities was instrumental in facilitating transactions of all kinds. For instance, a mutual fund offers and redeems shares every day, and the offering and redemption price is determined by the aggregate value of the securities held by the fund. If securities are overvalued, an investor redeeming shares is overpaid at the expense of continuing shareholders; if undervalued, the redeeming investor is underpaid and continuing shareholders reap a windfall.
I am an attorney, not a financial analyst, and while I have significant training in economics I am no expert. But through years of advising clients I had gained sufficient knowledge and experience that in the 2007-2009 period I found myself on several panels presenting programs on hard-to-value securities. My panel colleagues were financial analysts, and they offered useful advice about development and use of various “models” to determine an agreed value to these hard-to-value securities. I was always bemused by their presentations because each implicitly suggested a level of definiteness that was entirely unwarranted. Being unafraid to be the skunk at the garden party I offered criticism, and suggested that in these situations one should factor in an uncertainty “haircut” (discount), because the level of uncertainty in the process was material. I never had any takers but my point stands: we have to acknowledge – and deal with – the fact of uncertainty.
And boy do we have it now. Many unspoken words hang in the air -“when?” and “what if” and the like. When will there be a treatment, when will there be a vaccine, when will reopening occur? What if the economy is slow to recover? What if job losses persist? Etc. The simple answer to each is the right answer: We. Just. Don’t. Know.
So it falls to us to learn to manage the uncertainty.
At a “micro” level, we already know how. Or at least have ways of coping. For example, one of the earliest effects of the emerging pandemic was that store shelves were quickly emptied of toilet paper.* Game theory demonstrates this is a no-brainer. In a decision-making situation, or game, we intuitively look to see if there is a dominant strategy, a “move” that is better for us regardless of what our “opponent” does. We have a choice: make no change in our supermarket behavior or acquire and hoard tp. Ideally no one changes his/her behavior. Store shelves remain stocked in ordinary course. However, from my perspective, if I make no change and others go the hoarding route, I am at a loss.** If I, too, hoard, along with everyone else, I at least get my share. And if I alone hoard while others do not change behavior I can buy a lifetime’s worth, but no worry, no “best if used by” date applies. So regardless of what “you” do I am better off if I hoard. This is a familiar result in game theory: the societally preferred result is disincentivized. But this “micro” phenomenon is of only passing interest to me. It’s managing the “macro” level of uncertainty that’s of interest. And here game theory is of no use.
I believe the “macro” uncertainty issue presents at least two distinct but interrelated questions. As we experience uncertainty we make certain assumptions to attempt to manage the uncertainty, e.g. “well the coronavirus pandemic will be in the rear-view mirror by (pick a date)”, and “the economy will be on an even keel by (pick a date)”. The first question is, “what if we’re wrong?” The second, larger question is, “what if we can’t know?”. Larger because the question addresses the crux of the matter: we do not like uncertainty and want to feel that any period of uncertainty is finite, that there will be an end. But now apply the first question.
I wish I had a solution, or even useful practical advice to deal with macro uncertainty, but I don’t. But I do have a perspective. Governor Andrew Cuomo of New York, in his daily briefings, has several times mentioned the question he most often hears, “when will be back to normal?” His answer: we’re not going back to normal. We need to take the lessons of this pandemic emergency and reimagine our futures. There will be a new normal. I believe that one of the linchpins of the “new normal” will be an acceptance of uncertainty. As I tried to tell my panel colleagues those many years ago, by all means pursue measures to reduce uncertainty but let’s not put too much faith in our conclusions.
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* What is it about toilet paper? Is butt-wiping somehow a primal activity that must be safeguarded? Or are we just collectively full of . . . something?
** Of course, there is an apt colloquialism for my situation here, but decorum precludes direct mention.
Retired attorney and investment management executive. I believe in life, liberty with accountability and the relentless pursuit of whimsy.