This ‘era of unprecedented uncertainty’ is built on nothing more than perception

2020 has been unprecedented. Just over half distance and we’ve faced the prospect of World War III, a global health crisis, the worst recession for several decades, race riots and a plagues of locusts. I’m sure the second half will be fine. A divisive US Presidential election and structural problems with China’s Three Gorges Dam? Nothing to see here.

The events and their confluence have been unprecedented, yet it is the coronavirus that is understandably contributing most to individual perceptions of uncertainty. As the Bank of England describe in a recent paper, there is uncertainty about almost every aspect of the COVID-19 crisis:

On the epidemiological side these include the infectiousness and lethality of the virus; the time needed to develop and deploy vaccines; whether a second wave of the pandemic will emerge; the duration and effectiveness of social distancing. On the economic side, these include the near-term economic impact of the pandemic and policy responses; the speed of economic recovery as the pandemic recedes; whether temporary government interventions will become permanent; the extent to which pandemic-induced shifts in consumer spending patterns, business travel, and working from home will persist; and the impact on business formation, and research and development.

The Bank of England used two sentiment based measures of uncertainty to show how the current crisis compares with economic and political events of the past two decades. Newspaper based measures reflect the real time uncertainty perceived and expressed by journalists. Meanwhile, Twitter based measures reflect the same real-time fears among everyone with a Twitter account. Both measures reflect articles and tweets that contain the terms “economic” and “uncertainty” and variants of them. Both measures align reasonably well and clearly show a spike in perceptions of uncertainty to record levels in early 2020.

The question is really whether uncertainty is really that unprecedented. After all the future is always uncertain. It has always been that way. It always will. Could it be our perceptions and how they are formed that is the real driver behind the apparent surge in uncertainty?

As I describe in my latest book, until relatively recently the media was something that was done by ‘others’ and broadcast to you and I. That changed with the advent of social media. Now we can all wield some power. But in doing so it has subverted our perception of the world and exaggerated each individual’s perspective as the one true reality. When the media has too much influence over the reality it was designed to mimic, the flow of information becomes increasingly less efficient. In this world, expectations, perception and opinion are the currency of influence.

The narrative of COVID related uncertainty is continually propagated in a strong feedback loop. The media publish stories highlighting the uncertainty. Twitter and other social media users spin their perceptions out to their followers. The divisive nature of social media makes it worse as groups flock to whichever side of the debate they feel most closely fits their perception of reality.

Uncertainty is all about low levels of confidence. In the same way that psychology indicates that we dislike losses twice as much as an equivalent gain, we abhor uncertainty more than we crave certainty. In the words of Yuval Noah Harari we are “full of fears and anxieties over our position, which makes us doubly cruel and dangerous.” According to Peter Atwater, uncertainty can seem precarious due to two key elements:

The first is truthfulness. When things are uncertain, we have difficulty distinguishing fact from fiction. We don’t know who or what can be believed or trusted. That we are now awash in conspiracy theories and “fake news” should come as no surprise then. Truthfulness is binary; and the more that is uncertain the more that IS uncertain. Like so many things confidence-related, there is reflexivity to certainty that leads to both virtuous and vicious cycles.

Which brings me to the second element of certainty: predictability. When things are certain, there is an order that we believe can be extrapolated into the future. Not surprisingly, there is a high correlation between confidence and norms, rituals, habits, routines, laws, rules, and regulations.  Whether codified by law or through muscle memory, we love to know that what is will be the same ahead. 

On the other hand, when things are uncertain, we perceive a dangerous randomness in which anything can and will happen. Planning amid uncertainty seems foolish.

Preying on the stressed and fearful is big business. It’s perpetuated by and in turn driven by the media cycle. It drives demand for everything from insurance, burglar alarms, even gold. Remember though that perceptions of uncertainty are built on nothing more than confidence. As the uncertainty index chart demonstrates, ‘animal spirits’ can rapidly turn from depression to euphoria, and vice versa. For the investor this means being attuned to the media news cycle, not being drowned by it, but just observing it.

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