Understanding Uncertainty and Making It Work

For the past five years, I’ve been diligently investing in ETFs through dollar-cost averaging, much like I persistently try to improve my fitness levels, though with noticeably more financial sweat than physical. At the start of the year, despite getting battered through 2022 on equities, I had set a fairly ambitious dollar amount target for my investment portfolio. This goal was a part of my larger plan to hit a specific number by the time I turn 40, which is looming on the horizon.

Thanks to the AI rally, I did end up hitting my target number by November. However, loss aversion set in the minute I hit my number. As I pored over the data and chatted with colleagues, the consensus emerged that equities were overvalued. The PE ratios of SPY (S&P 500 ETF) seemed to suggest the same.

In a move that felt like switching from intense training to a walk on the treadmill, I decided to safeguard my hard-earned gains. I liquidated the equity portfolio and parked all the funds in T-Bills.

Now the purpose of this essay is not to analyze my investing prowess (or lack thereof) or delve into macroeconomics to understand market cycles, but an attempt to understand the psyche behind this move.

Why did I choose to avoid the uncertain, yet possibly more lucrative, returns from equities and settle for the safer, but lower, 5% return of T Bills? In hindsight, I passed up a 5% increase in SPY that happened in just one month (December), in favor of a guaranteed 5% annual return.

The answer lies in our discomfort with uncertainty. We’d rather take a known chance of winning than gamble on the unknown.

We often prefer known risks over unknown ones, a behavior known as ambiguity aversion. Daniel Ellsberg, famous for the Pentagon Papers, brought this idea into the spotlight in 1961. He showed that people usually choose options with risks they can figure out, even if a less certain option might bring better results.

Ambiguity aversion can stop us from doing things like investing in stocks, trying out a new job or field, or going for new medical treatments when we’re not sure of the risks. It seems sensible to stick with what we know, but this fear of the unknown also stops us from grabbing great opportunities. Often, doing well at work or in the markets depends on how we handle uncertainty.

I saw this in myself when I was deciding on a career. As kids, we’re interested in many things – history, art, geology, music – but many of us end up choosing familiar careers like medicine, engineering, or finance. Money is one reason, but a big part of it is also our fear of the unknown.

Fields like finance and medicine have clear paths to success. They’re like school – you know what you need to do to do well. So, instead of embracing the uncertainty of following our passions in areas like the arts or technology, we often choose the path that feels safest.

This preference for the familiar isn’t just something students face; it’s common in business too. Fear of what’s unknown makes companies stick to old ways instead of trying new things. Think about Blockbuster or BlackBerry, which didn’t adapt to changing times. It’s the same fear that makes leaders keep employees who aren’t quite right, thinking it’s better than taking a risk on someone new. And it’s what keeps employees from chasing innovative ideas that could be more rewarding, both personally and financially.

It’s natural for us to not like uncertainty, but it’s important to learn to live with it. We can’t get rid of uncertainty or ambiguity completely; that’s just part of life. But we can manage it. Here’s how:

Creating Certainty Anchors

Jonathan Fields talks about “certainty anchors” in his book “Uncertainty.” He describes them as things in our life that give us a sense of stability when everything else is up in the air. The idea is pretty straightforward: when there’s a lot of uncertainty around us, these anchors help keep us steady and clear-headed.

These anchors are things like our daily routines, habits, and personal rules. We start to feel anxious when we lose these anchors. For instance, when I abandoned my regular investment strategy and fixated on an arbitrary number (which might not even be that important), I felt more anxious. It showed how losing these anchors can impact our peace of mind.

Steve Jobs is a prime example of using certainty anchors. He wore the same outfit every day – a black turtleneck, blue jeans, and sneakers – not as a fashion statement, but to reduce daily decision-making. This routine allowed him to focus on bigger challenges at Apple, proving how small, consistent practices can create predictability in a world of uncertainties.

Get Perspective

Handling uncertainty is hard because we often worry more about what could go wrong than what might go right. This mindset, known as loss aversion, affects our decision-making. For example, when considering two job options, like a reliable job in a large corporate versus a new tech startup, we tend to focus more on the risks of the startup, even though it might offer higher returns and growth.

To manage this, we need to shift our mindset using cognitive reappraisal. This approach involves changing our perspective on uncertain situations. We can’t predict the future, but we can change how we view it.

A practical technique for this is Tim Ferriss’s fear-setting. It involves an honest assessment of the positives, the negatives, and the implications of inaction in any situation. This method helps us avoid always expecting the worst.

We often catch ourselves thinking: What if this goes wrong? What if my decision fails? What if the new job does not work out? But it’s equally crucial to consider the potential benefits. We should think about what we might gain, even if things don’t unfold exactly as planned. The worries we experience in the face of the unknown can actually indicate that we’re on the verge of something innovative, but only if we stay open to the possibilities.

I’ve found that documenting our decision-making process can offer clarity. A friend and a mentor at work once introduced me to this decision-making journal template. Although I haven’t always been consistent in using it, it’s been invaluable in providing perspective.

Be Persistent

Investing often feels like navigating a car through heavy fog. Your view is restricted, and what lies ahead is uncertain. The crucial thing, however, is to keep moving, stay the course, and trust that you’ll eventually arrive at your destination. The most vital aspect is not to halt your progress.

Frequently, the worry about potential future issues is more daunting than facing actual challenges. This is true whether it’s the nervous wait for exam results or the dread of consequences following a mistake. We recall from childhood that the fear of our parents’ reaction was often more paralyzing than the punishment itself. It’s the waiting and the unknown that are usually the hardest to bear. The most effective strategy to counter this anxiety is to be proactive.

We often hesitate to try new things because of uncertainty about the outcomes. However, persisting through these unclear times can lead to unexpected success. Life is full of surprises, and the ability to keep moving forward, even without knowing the exact destination, is crucial. Our goal should be to continually progress, regardless of how well we can see the path ahead.

Recommended Reading

• Time Ferriss’s fear-setting exercise
• Uncertainty by Jonathan Fields