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## Key Points
– Modern Finance has attempted to quantify radical uncertainty using simplified models, leading to significant repercussions for the financial sector.
– There are various approaches to dealing with radical uncertainty, including the precautionary principle and embracing trial and error amid uncertainty.
– Cultivating a culture of surprise involves preparing for both positive and negative surprises in investment portfolios and policy decisions.
– Adapting to radical uncertainty requires a shift away from rigid orthodoxies and towards a more agile and adaptive approach to risk management.
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This article delves into the challenges posed by radical uncertainty in the field of finance and explores different mindsets and approaches to dealing with it. It emphasizes the need to prepare for unexpected events and cultivate a culture of surprise in both investment strategies and broader policy decisions.
The prevailing approach in Modern Finance has been to use overly simplistic models to measure radical uncertainty, a strategy that has had significant consequences for the financial sector and the broader economy. The article questions whether this denial of the true nature of uncertainty is a sustainable approach and advocates for a different mindset.
One alternative approach is the precautionary principle, which advocates for avoiding actions that could lead to adverse outcomes. However, the article highlights the potential paralysis that can result from this approach if taken to its logical conclusion.
Another perspective presented in the article is the idea of embracing trial and error amid the fog of radical uncertainty. This approach, advocated by John Kay and Mervyn King, emphasizes the need for adaptable decision-making and the constant revision of narratives in response to surprises.
In terms of investment portfolios, the article suggests the need for a culture of surprise, which involves preparing for both positive and negative surprises. It highlights the importance of diversification and having a margin of safety to buffer against unexpected market events.
The article extends the concept of a culture of surprise beyond the realm of investment, discussing its potential implications for health and environmental policy. It argues that a flexible, agile approach is preferable to maximum risk prevention, especially in the context of the COVID-19 pandemic and environmental policy.
Ultimately, the article advocates for a shift away from the rigid orthodoxies of Modern Finance and towards a more agile and adaptive approach to risk management. It emphasizes the need to be prepared for and responsive to unexpected events, building a culture of surprise that can better withstand radical uncertainty.
