Reviewed by E.B. Heath
When the Global Financial Crisis rocked our confidence in the banking sector, it was not envisioned that a few years on a virus could wreak yet more economic havoc on our world. And now, Covid19 has landed on the heels of devastating bush fires that brought global warming up close and personal for many Australians. So, it is hard to imagine a publication more opportune than Radical Uncertainty: Decision-making for an unknowable future, or two men more qualified to be its authors. John Kay and Mervyn King are highly regarded economists with forty years of high-level academic and business experience. Kay has held professorial appointments at the University of Oxford, London Business School and the London School of Economics. King was Governor of the Bank of England from 2003 to 2013, and is currently Professor of Economics and Law at New York University and School Professor of Economics at the London School of Economics. They apply this heft of experience to interrogate methods within economics, decision analysis, behavioural economics and finance. And they are not happy! In an accessible, often entertaining, style they explain why.
It all went wrong when economic theories departed from Frank Knight and John Maynard Keynes’ (1929) distinction between ‘risk’ and ‘uncertainty’. The authors make clear how this distinction is crucial to economic analysis: ‘risk’ can be compared to a puzzle, not yet solved but its parameters are measureable, whereas ‘uncertainty’ is like a mystery, our knowledge is incomplete therefore it is not measurable. Kay and King adopt the terms ‘resolvable uncertainty’ and ‘radical uncertainty’.
Radical uncertainty cannot be described in the probabilistic terms applicable to a game of chance … we do not know what will happen. We often do not even know the kinds of things that might happen.
This vital distinction collapsed when it was theorized that probabilistic reasoning, based on subjective probabilities of possible outcomes rather than known established probabilities, could be used for analyzing unique events. The mathematics used for the analysis of probabilities based on frequencies was applied to subjective probabilities. Probabilities and outcomes that may, or may not, exist, while ignoring the possibility of unimagined events such as Covid19.
Mathematical modeling of our complex society, say the authors, is problematic as human life has never been stationary. We live and interact in a state of flux, but are adept at making sense of the natural world through narratives built on evolutionary rationality rather than axiomatic rationality. As the authors explain, our knowledge of context and our ability to interpret it has been acquired over thousands of years. Unique events are dealt with by using abductive reasoning, which seeks to provide the best explanation from a set of known data, being updated as new information becomes available.
The authors believe the conditions of each context should be investigated by asking – What is going on here? This question acts as a mantra, reverberating throughout the book. Groups have proven to be the best forum, critiquing what they know, rather than making baseless assumptions.
I might add that change as constant is a western-centric idea. Indigenous Australians lived according to the narratives of their ‘stationary’ culture for thousands of years and have been, in many cases, unwilling to change the narratives of millennia. Interestingly, it is Indigenous knowledge that might have prevented the recent bush fires throughout Australia. To quote the authors: Under radical uncertainty, the premises from which we reason will never represent a complete description of the world. (p. 139) It is wise then that problem-solving forums should seek out the widest range of evolutionary knowledge possible and that would surely encompass other cultural knowledge.
So many topics are covered here, too many for one review, such as how bogus quantification led to the weakening of the British pension system. How Canadian fishing grounds suffered serious stock losses due to ‘sophisticated’ models, and the problems associated with insurance in a data rich world. Challenging narratives within medicine, politics and foreign policy, particularly how John F. Kennedy handled the Cuban Missile Crisis.
A noticeable absence from this otherwise comprehensive volume is the authors’ neglecting to discuss how institutions under their leadership, such as the Bank of England, employed collaborative forums, or indeed if they did.
But it is not all doom and gloom. The take home message being that if risk is managed via intelligent strategies then radical uncertainty becomes less of a problem. Kay and King explain how radical uncertainty advances evolutionary processes fundamental to social, technological and economic progress.
Radical Uncertainty: Decision-making for an unknowable future is a most interesting book; readers can only profit from a careful reading of this text.
Radical Uncertainty: Decision-making for an unknowable future
By John Kay and Mervyn King
Little Brown Book Group
Hachette Australia
Paperback
ISBN: 9781408712597 – $34.99
Hardback
ISBN: 9781408712603 – $49.99
Audiobook
ISBN: 9781405543781 – $35.99
e-Book
ISBN: 9781408712580 – $16.99
Pp. 528