Archive for the ‘uncertainty’ Category
How Risky Are Stocks?
Most of us believe that over the long run stocks are a great investment. Sure, there may be an occasional glitch – or terrifying plunge, as we’ve seen lately. But it’s commonly felt that if we just hang in there, stocks will eventually move inexorably higher.
Apparently it may be risky to have such beliefs.
Last fall I wrote about possible flaws in the ways Wall Street was assessing the riskiness of its obscure financial instruments. Now the New York Times reports there may also be flaws in the way we calculate the general riskiness of investing in stocks. After acknowledging that numerous studies of stock prices have historically found an increase in value over long periods of time, the Times notes:
But those studies were based on the stock market’s past performance, which, famously, provides no guarantee of future performance. New research, using different statistical techniques aimed at capturing the uncertainty of future returns, suggests that the market may be much riskier than many investors have understood.
This story involves a bunch of economics professors. There’s Professor Jeremy Siegel, of the Wharton School of the University of Pennsylvania and the author of “Stocks for the Long Run.” He’s an advocate of the idea that stocks increase in value over time. Then there are Lubos Pastor, a finance professor at the University of Chicago Booth School of Business, and Robert F. Stambaugh, also of the Wharton School. They argue that “uncertainty about market fluctuations increases with the holding period.”
While most people realize investing in stocks involves some uncertainty, the question is how to evaluate that risk.
It is one thing to acknowledge the existence of uncertainty, but quite another to measure its influence on long-term market volatility. To do that, Professors Pastor and Stambaugh rely on a statistical approach pioneered by the Rev. Thomas Bayes, an 18th-century English mathematician. Bayesian analysis is often used to assess the uncertainty of future outcomes, based on a formula for updating the probabilities of given events in light of new evidence. This approach is quite different from traditional statistical measurements of probabilities based on historical data.
Applying Bayesian techniques, the professors found that reversion to the mean isn’t powerful enough to overcome the growing uncertainty caused by other factors as the holding period grows. Specifically, they estimated that the volatility of stock market returns at the 30-year horizon is nearly one and a half times the volatility at the one-year horizon.
So why haven’t we heard about this alternative take on the risk of investing in stocks? Some might sense a conspiracy among economists and stock brokers, leading investors down a primrose path. But that ignores the fact that economists and brokers are also frequent victims of downturns in stock value.
The more likely reason is embodied in a statement commonly found in many fields: “that’s the way we’ve always done things.”
But Professor Pastor says that these methods are better suited than the standard techniques for quantifying the uncertainty faced by real-world investors. Even if Bayesian approaches have yet to become mainstream in financial research, he adds, they have become much more widely used in recent years.
One lesson we can take away from this story is to recognize that investing in stocks may be riskier than we’ve been led to believe.
But beyond that we need to realize that uncertainty is always part of our world. That’s true whether you’re a big Wall Street firm juggling obscure financial instruments or a small investor building a nest egg for retirement. All too often, the experts tend to gloss over this uncertainty, either confident in their own smarts or fatalistically resigned to the whims of chance. And all too often, ignoring uncertainty leads to disaster.
Fortunately, some experts are now devising or rediscovering ways to confront uncertainty head-on. Regardless of the field in which they’re working, it’s time we listen to what these experts have to say.
Dances With Sled Dogs
Filed under: energy/flow, uncertainty | Tags: Iditarod, positive reinforcement
Leave a Comment You never know where you might find a secret to success. Sometimes you have to start by getting past common misconceptions.
The Iditarod, a dog sled race that covers 1,049 miles between Anchorage and Nome, Alaska, isn’t very popular among some in the animal rights community. Some activists claim that “…the Iditarod takes things too far, that in addition to incidents of animal abuse by mushers, the dogs are pushed beyond their limits. And, activists argue, there’s no telling what happens to the dogs before and after the race.”
It may be true that over the years some mushers tried to force their dogs to go faster and longer through abusive behaviors. But after reading accounts by the mushers themselves, and by seeing the start of this year’s Iditarod, I sense there is often a strong bond between many mushers and their dogs.
Start of the 2009 Iditarod in Anchorage
A prime example of this is Martin Buser, a four-time winner of the Iditarod and the holder of the fastest race time ever (8 days, 22 hours and 46 minutes, in 2002). In the book More Iditarod Classics, Buser spoke about the approach that gained him his first victory:
I never harped on negative discipline; I always harped on positive reinforcement. For a few years there was a lingering question of whether you could win with a soft-hand philosophy. Subsequently, that’s the new way. Our dogs run faster, last longer, live longer, and are happier the new way…At the finish line, only my dogs and I really knew how cool it was to be there the way we got there.
After Buser won two more Iditarods, his life became cluttered with the other responsibilities and projects that can be a by-product of such success. Then he got a wake-up call, by way of finishing 24th in the 2001 race. He realized that, while he had been doing all of the usual preparations and training beforehand, his focus was elsewhere:
I sort of forgot about the intuition and the closeness, and what had been cherished all of those years: the true camaraderie and intuition that I had with the dogs.
He responded by simplifying his life and getting back to that positive approach:
The whole season was for joy and fun…We did a lot of training that I had never done before. I made more loose runs than ever before, free-running the dogs, camping more than ever before.
That spirit carried on in the 2002 race itself. Buser’s philosophy was “If a guy goes to work happy, he does a much better job.” A case in point was his mandatory 24 hour layover, which he took as the first team into Cripple. Usually, a team’s dogs remain tethered together while they rest. Buser turned all of his dogs loose.
There’s not a lot of traffic, and there aren’t a lot of people. I stomped out a wider trench than normal. I just flaked out the straw and turned the dogs loose so they could be wherever they wanted. They could pick whomever they were sleeping next to, and they woke up and went to the sled and stole food and went back to their spot.
The people at the checkpoint couldn’t believe it. They would come to me and say, “Hey, you have a loose dog.” And I’d say, “I hope they’re all loose. I hope they didn’t chain themselves up.”
Even when the team encountered adverse conditions on the trail, whether breaking trail or pushing into a fierce wind, Buser’s dogs kept on flying. And in the end, thanks in good measure to his positive approach to training and racing, Buser and his team set the record for the fastest Iditarod ever.
Cim Smith and one of his lead dogs in Anchorage
We often hear talk of people sensing a kind of human energy: a team or performer is “energized by the crowd” or an artist is “energized by her latest work.” While we may not be able to explain it, we have a sense of what such talk about energy means. When we feel energized we are focused, alert, and motivated, feeling powerfully connected to an event, person or object with which we are relating. Conversely, at other times we will feel drained of energy from dealing with certain people or situations.
Those who have had training in certain fields – like yoga, martial arts, and occasionally psychology – may be particularly aware of this kind of energy. With enough training and practice, they may even be able to generate and channel it. The same can also be true of elite athletes.
A key factor in these situations is a sense of control. If we feel that we are actively involved in what’s happening and have control over our actions, we are more likely to feel motivated and energized. On the other hand, if we feel we don’t have any say in what happens and are basically doing what others say we should do, we are more likely to feel withdrawn and unmotivated. As Mihaly Csikszentmihalyi, author of the book “Flow: the Psychology of Optimal Experience,” once observed:
“Repression is not the way to virtue. When people restrain themselves out of fear, their lives are by necessity diminished. Only through freely chosen discipline can life be enjoyed and still kept within the bounds of reason.”
At times when we feel uncertain about ourselves or a situation, we have a tendency to focus on gaining control of things. But this is hardly ever effective. At best we provoke resentment; at worst we inspire active resistance. In any event, we are setting things up for eventual failure.
Instead of striving for control, perhaps we should try focusing on inspiration and motivation. Instead of only punishing bad behavior, we might try focusing on and promoting positive outcomes.
If we remember to inject some “joy and fun” into our activities, we’ll do more than just achieve our best performance. We’ll also be able to bask in knowing “how cool it was to be there the way we got there.”
===Photographs from 2009 Iditarod by Dave Higgins===
Butterflies on Valentine’s Day
Filed under: chaos, uncertainty | Tags: Butterfly Effect, careers
Leave a Comment Does the flap of a butterfly’s wings in Brazil set off a tornado in Texas? ~ Edward Lorenz
When you reach a certain age, you realize that there were certain moments in your past that significantly affected who and what you are. My life would be very different today if Mona at the Job Service office hadn’t told me back in the 70′s about an upcoming civil service test, or Becky at a friend’s party hadn’t persuaded me back in the 80′s to give aikido a try.
The same can also be true of relationships: looking back, you may realize that one person has had a profound effect on your life. For some, it might be a teacher or mentor; for me it was Susan.
I first met her on a ski weekend at Stowe in December, 1994. Each year about 100 of us go to Stowe to start the ski season off with skiing, lessons and camaraderie. Many of us have participated in this ritual for years, so new people tend to stand out. At the Thursday evening party that year, I noticed a cute blond standing by the fire; I went over and introduced myself.
I soon learned that her name was Susan and she lived in Rhode Island. Someone she knew through work, who lived in Michigan, had mentioned he was a regular at our clinic (the group comes from a variety of places around the country). She was interested in improving her skiing, so she signed up with the trip organizer. Her Michigan friend wound up not being able to attend the clinic that year, but Susan decided to go anyway.
I was intrigued by both her appearance and the way she spoke, and we wound up hitting it off. By the end of the weekend, we made plans to get together for New Year’s weekend. As things turned out, that second weekend together didn’t go quite so smoothly. While it ended on an awkward note, we still were attracted to each other and decided to keep in touch.
To make a long story short, we continued to see each other and our relationship grew. We dated for about two years, until the strains that often come with a long distance relationship took their toll. But even though we stopped dating, we’ve kept in touch – commiserating occasionally about work, relationships, skiing and life in general. Although our lives have gone in different directions, I still feel a special connection with Susan.
A few days ago, I was clearing out some files on my computer when I came across a copy of an email Susan had sent me a week after our bumpy New Year’s weekend. There were a number of things that struck me about that note, including her insight into some issues I was facing at the time and her generosity in focusing on what I was going through (rather than any irritations she may have felt about my behavior that weekend).
But beyond that was a sense of how far I’ve come since that time. Before then I had felt blocked and frustrated, having a sense of what might be called my “vision” but not knowing what to do about it. But thanks in great part to Susan’s encouragement and example, I’ve been able to get beyond that blockage and just do things I believe in, without too much concern about their outcome.
That can be a big step – especially when your ideas are out of the mainstream, as some of mine seem to be. But thanks to Susan, I went ahead and signed up for my first Pan-Mass Challenge. And thanks to her, I turned my offbeat ideas into my web site Quantum Age …and now this blog.
Edward Lorenz was a pioneer in chaos theory who coined the term “butterfly effect” to describe the phenomena in which small variations at one point in time can create a dramatic difference in outcomes. This is now a common subject in popular culture, even if some scientists feel it’s sometimes used incorrectly.
I believe it does have a usefulness in understanding how certain events or people can have a profound effect on our lives. The catch is we need to understand that it’s impossible to predict in advance which events or people will have that effect.
Last spring I was on a panel of former political science graduates at my college, Hobart & William Smith. Our task was to give current poli sci majors an idea of the range of career opportunities they might pursue with their degree. But one thing that struck me was the hunger many of them had to nail down a “right” answer to the question “What should I do?
Our panel tried to give our audience ideas, but I had the sense we weren’t really giving them what they wanted. What that was, it seemed, was certainty: the message that if you do such and such, everything will work out well in the end.
The problem is that life is always uncertain. For one thing, we don’t know how much the world will change over the course of our lives. When I graduated from Hobart in 1974, there was no way I could have known I would someday spend much of my working time on a personal computer, and include among my pasttimes creating and writing for a web site and blog. Such things hadn’t even been thought of back then. Beyond that, we have no idea what future events and people will come to have a profound effect on the direction our life will take.
I won’t presume to tell others how to live their lives. But personally, I believe there’s a value to not getting too hung up about the future. Instead, I believe it’s important to be aware of what is going on around you and what strikes a chord within you, and to then act. Maybe you won’t wind up wealthy and famous. Maybe others will even consider you a little peculiar. But if you are at one with yourself, that won’t really matter.
Who knows? Maybe some day you’ll be lucky enough to meet someone who will enrich your life in unpredictable ways.
Happy Valentine’s Day, Susita!
Reality Isn’t What It Used To Be
Filed under: uncertainty | Tags: democracy, George W Bush, Obama, politics, reality
Leave a Comment Reality is that which, when you stop believing in it, doesn’t go away. ~Philip K. Dick
The world would probably be a lot better off if people weren’t so smug about their sense of reality. Regardless of nationality, religion or political affiliation, we have a tendency to believe we have a firm grip on The Way Things Are, and a confidence that our actions and beliefs are clearly the best way to deal with life’s issues both large and small.
The fact that many things in life today, including many things other people do, appear nonsensical to us is just a minor detail. We know what’s what, and we tend to feel it would be better for all concerned if everyone saw things the way we do.
We never seem to realize that big chunks of our understanding of reality reflect our own biases and perceptions, not the inherent nature of the world “out there.” The perceptions we embrace with certitude are in fact usually best guesses about what is happening around us. And our certitude in these perceptions leaves us open to manipulation by others who present stories we find conveniently agreeable, even when those stories are lies. That certitude can also blind us to warning signs of coming disaster.
Ron Suskind once related a story about an anonymous aide who spoke about the Bush Administration creating its own reality:
The aide said that guys like me were ”in what we call the reality-based community,” which he defined as people who ”believe that solutions emerge from your judicious study of discernible reality.” I nodded and murmured something about enlightenment principles and empiricism. He cut me off. ”That’s not the way the world really works anymore,” he continued. ”We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality — judiciously, as you will — we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors . . . and you, all of you, will be left to just study what we do.”
Many of us with a liberal point of view may tend to view this Bush/Cheney perspective from a lofty perch in the “reality-based community” and conclude that these people are either sinister or crazy. However we need to recognize there’s an element of truth in that aide’s statement. And then we need to decide how to deal with it.
On the most simple level, the aide was right. The Bush administration has created realities – in the Middle East, in New Orleans, on Wall Street and Main Street – that we’re now trying to figure out how to deal with. The key proviso that they either didn’t acknowledge or didn’t recognize was that those created realities often turned out to be quite different from what they themselves expected.
But beyond that is a much bigger question: what is reality today? In his book “Reality Isn’t What It Used To Be,” political scientist Walter Truett Anderson argues that in today’s postmodern world we are inevitably dealing with socially constructed realities. He notes the relevance of this in understanding modern politics:
“…the real fount of political power, the source of all loyalty and all independence, is the reality-creating process by which we decide who we are and what we think is happening.”
Although this book was published in 1990, it appears to define a problem Democrats have had lately in presidential elections: while Republicans provide stories to voters about who we are and what is happening, Democrats all too often respond with position papers and program promises. The egghead label that frequently stuck with Gore and Kerry – and has threatened at times to stick to Obama – is probably rooted in this distinction. (Note that Bill Clinton, who was also an exceptionally intelligent politician, managed to generally avoid the egghead label by – among other things – connecting with voters and “feeling their pain.”)
As we’ve seen over the past eight years, Republican hubris in reality-making has frequently doomed their plans to failure. Anderson notes: “…our deliberate reality-creating, future-making, civilization-building projects always turn out to have unexpected consequences…” This is especially true when you fail to recognize that you’re not operating in a vacuum; that others are creating realities at the same time you are.
Being a member of the “reality-based community” can only be useful when we recognize this truth: in today’s world we are each involved in creating realities, and such realities always exist within a larger context of other people’s realities.
As for the many problems confronting us today and in the upcoming election, Anderson provides a perspective from 18 years ago:
“This is the issue that mass democracies are going to have to come to terms with: whether we can construct our large-scale public realities in forms that enable us to grow and change and engage the difficulties of life in adult ways, or whether we will inevitably gravitate toward simple fables of good guys and bad guys.”
