Radical Uncertainty: Decision-making for an unknowable future
Economics would do well to turn its mathematical prowess away from the idea that economic agents are busy maximising something and must focus on “what’s going on here.”
And “what’s going on” is quite simple: we all have some sort of dream! (the word the authors use is “narrative.”) As we gather information, we assess how this new information influences our dream and adapt accordingly.
Speaking of which, they’re totally on-the-ball: top of page 40 they as-good-as predict the current coronavirus crisis. And in pages 408-409 they introduce the concept that “the large corporation is the most important actor in the modern economy, and it is surprising how little attention has been given to the economics of organisation.”
So there you have it: to get out of our bind, to understand the economy and to be able to make decent predictions about the future, we need to study the narrative that’s in the head of the captains of industry and predict how they will react to new information, be that incremental or some type of shock. That’s the main takeaway here.
Three main propositions run through this book.
First, the world of economics, business and finance is ‘non-stationary’–it is not governed by unchanging scientific laws.
Second, individuals cannot and do not optimise; nor are they irrational victims of ‘biases’ which describe the ways they deviate from ‘rational’ behaviour. Kay and King distinguish axiomatic rationality, as used by economists, from evolutionary rationality, as practised by people. They argue that many so-called ‘biases’ are better interpreted as logical responses to the complex world of radical uncertainty.
Third, they note that humans are social animals and that communication plays an important role in decision-making. This ties in with the importance that “narratives” play in their account of how people actually navigate the uncertainties of the real world.
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