The Cult of Uncertainty

A colleague and I agreed the other day that if we could banish one word from the economic lexicon, it would be "uncertainty."

Why? Because uncertainty has become the overused excuse for anything you don't want to do or are unhappy with. Scared to invest? Blame uncertainty. Low returns? Uncertainty. Businesses aren't hiring? It's due to uncertainty. High deficits? Uncertainty. Upset stomach? Must be that darn uncertainty.

Uncertainty is the inability to predict the future. And if you say there's more uncertainty today (as many do), it follows that there had to be less uncertainty at some time in the past. It's just hard to quantify what that means.

Well, it was, anyway -- until now. A group of economists from Stanford and the University of Chicago started a website called, which attempts to track uncertainty over time. They do it by measuring mentions of "uncertainty" in 10 major newspapers and changes to the tax code. It's a really smart idea.

What do their results show? Here's "uncertainty" over the last 27 years:

Sure enough, there's lots of uncertainty today.

But here's what baffles me about this chart: Uncertainty bottomed -- and thus, certainty about the future peaked -- two distinct times in the last two decades:

  • In the months before the 9/11 terrorist attacks.
  • In the months before the financial crisis and bank bailouts.

That should give you pause about how seriously to take today's uncertainty problem.

You will never hear the cult of uncertainty say, "Boy, I wish we could go back to the predictability we had in 2007, just before the financial crisis I didn't see coming, the stimulus package no one could have predicted, and the health care reform bill no one foresaw." But look at the data, and that's what they're longing for.

The lesson of that is simple: The world is always uncertain. No one has any idea what will happen next. What changes is people's perception of uncertainty, and that's driven overwhelmingly by recalling the recent past, not by forecasting the future.

Take the top two issues the cult of uncertainty has beef with.

1. "I don't know what my tax rate is going to be next year."
Right, but that's always been the case. Congress and the president can change the tax code at any time; there is no such thing as permanent reform. Since 1913, the top marginal tax rate has been tweaked on average every 3.3 years, and many of the changes were unforeseen results of a new administration or a new war that needed funding. The world where you can say, "I know what my tax rate is going to be for the next X years," has never existed, and it never will exist. Get used to it.

2. "I don't know what health care costs are going to be next year."
Again, you never have known. For decades, health care costs have been one of the most elusive variables that exist. That's true not only of actual medical costs, but of regulatory changes, too. The Affordable Healthcare Act wasn't the first attempt to alter health care in America -- not by a long shot. We've been doing it like clockwork for a century:

  • 1915: American Association for Labor Legislation drafts a bill for consideration detailing "protection of all low-income workers [providing] cash compensation and broad hospital and medical benefits to both workers and their dependents."
  • 1921: Sheppard-Towner Act provides federal funds for state-run maternity and child health programs.
  • 1935: Committee on Economic Security considers health care as part of coverage under Social Security program.
  • 1944: President Roosevelt calls for "The right to adequate medical care and the opportunity to achieve and enjoy good health."
  • 1946: Hospital Survey and Construction Act provides grants to improve health care facilities. Taft-Smith-Ball bill provides state grants to subsidize care for the poor.
  • 1965: Medicare begins, along with new taxes to pay for it.
  • 1974: In his State of the Union address, President Nixon says, "I shall propose a sweeping new program that will assure comprehensive health insurance protection to millions of Americans who cannot now obtain it or afford it."
  • 1985: President Reagan signs the Consolidated Omnibus Budget Reconciliation Act (COBRA), providing access to health insurance post-employment.
  • 1993: President Clinton proposes health reform, commonly known as HillaryCare.
  • 2003: Medicare Part D (prescription drug subsidy) is introduced.

And so on.

At any time during the last century you could have said, "I don't know what my health care costs are going to be next year," citing the pending health-care reform of the day. If you're waiting for a world where no one tries to fiddle with health care, good luck; that, too, doesn't exist.

You have to learn how to deal with uncertainty. It's just part of life. Some is caused by policy, most is just sheer randomness -- but it's always there.

As an investor, the most dangerous part of fretting over uncertainty is that you're likely to do so at the worst possible times.

A few examples: People didn't start worrying about our economy's debt problem until the debt-to-GDP ratio was declining for the first time in 40 years. People didn't start thinking the stock market was a sucker's game until valuations set them up for the best returns in decades. And worries that the world would soon run out of oil peaked right at the start of the biggest domestic oil boom in half a century. If you followed what "uncertainty" was telling you about these three trends, you missed reality by 180 degrees each time.

Warren Buffett put it better: "If you wait for the robins, spring will be over."

Uncertainty will never die. But let's stop using it as an excuse to worry.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 


Read/Post Comments (12) | Recommend This Article (38)

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  • Report this Comment On December 13, 2012, at 1:35 PM, RenegadeIAm wrote:

    Pretty silly overall.

    The "study" did NOT "track uncertainty."

    It tracked REPORTING on uncertainty. How that correlates with actual uncertainly is unknown--but probably it does't at all.

    The sum of uncertainties by a vast investing/consuming population is likely best reflected in the actual state of the economy--not in how much reporters decided to report on uncertainty.

    It's normal human behavior to be more cautious when they are not confident of the future ("uncertainty") and to be less cautious when they are confident of the future ("certainty"). Not EVERYONE is like that, of course, but the tendency is there.

    Probably, then, "uncertainty" is the wrong word to use to describe a lack of confidence in future economics, so a "study" that "tracks [mentions of] uncertainty [by reporters]" is not a good basis to glean any rational information about what's going on.

  • Report this Comment On December 13, 2012, at 1:40 PM, damilkman wrote:

    Greetings. My comment is that not all uncertainty is created equal. It is dependent on the probablity of the uncertainty. Yes, the world could be hit by a life ending astroid. However, I do not panic because even if there was an astroid out there I am ignorant. However, if scientists tell me there is an astroid that will pass very close to the earth tomorrow and there is a 30% chance of all ife ending, I will be panicing.

    We cannot act on our ignorance unless we are chicken little. The point of why investors react to uncertainty is they believe there is a nontrivial PROBABILITY that a bad thing that will impact their potential investment could occur.

    So for example take the current fiscal cliff debate in context to any other year. It is reasonable to be worried and invest accordingly because there is a strong possibility of no deal because we observe two entrenched sides. Ignoring this situation and giving it the same probablity of badness as a random lightening strike is well foolish. When I am on a mountain in a storm, and my hair is on end, it is reasonable to be concerned that I might get zapped.

    Conversely if this is a normal year and there is not a fiscal fight, I do not let the budget process impact my investing intentions. It may be that the president and congress covertly have plans to rock the boat. But I cannot quantify and would thus view as a lightening strike on a sunny day. Using my lightening analogy I do not duck & cover on a sunny cloudless day. There is uncertainty. However, the probability of a lightning strike is low.

    In summary, uncertainty is just another form of information. Ignorance is the absense of this knowledge and the reason why I might not react to a possible event. What if I were the only person who knew 9/11 was coming? How rich could I have become. So do not knock these people who are just acting on information. The fact that there is uncertainty is still useful information. Each investor has to make a decision with the knowledge that the bad thing that could impact their investments could occur. To ignore it as a random action is again in my mind foolish.

    On a side note uncertainty is absolutely why therei is a futures market. If your a company and a certain comodity is essential for your buisness it is often better to hedge and lock in a certain price as guaranteeing and knowing the cost is acceptable is preferable to the uncertainty even if the cost might actually be lower. If you have cash to spare and the risk is worth while, then the risk is worth while. But some investors cannot afford the risk as the down side outweighs the benefit. So I would say uncertainty does indeed belong in the economic language. I would say all of those retires in locked in guaranteed anuities would agree with me.

  • Report this Comment On December 13, 2012, at 1:44 PM, astuber9 wrote:

    Best article in a long time. I tell people if they want certainty they should move to a country run by a dictator. The fact that we can vote in new politicians and they change the rules is a good thing. That means we are voting out the bums, except they all seem to be bums lately.

  • Report this Comment On December 13, 2012, at 2:25 PM, HighVoltage627 wrote:

    i suppose one thing i note about this is that when "uncertainty" is low, it corresponds to a to a market peak, and therefore a good time to get out of the market.

    Conversely, when uncertainty peaks, it generally corresponds to lows in the markets, and is therefor a good time to buy.

    This doesnt strike me as much more than the classic contrarian play. In the words of Buffet "be fearfull when others are greedy, and greedy when others are fearful."

    One more side note, but according to your chart, uncertainty is spiking right now. I think I'll go buy some stocks.

  • Report this Comment On December 13, 2012, at 3:06 PM, Subsound90 wrote:

    Being certain is a good thing to a certain degree is a good thing, but waiting for too much certainty is a disaster waiting to happen. I can’t count the number of people I’ve known, or I have listened to sob over a beer, that were never certain enough to invest till a bubble was cresting. Pundits and articles were bombarding them with great news of certain gains in the future that were better than they could believe.

    Then the bubble popped and took a great portion of their money with it. Every single one sold it all and swore never to trust the market again. Then they are fearful of any financial decision again, and rarely trust the market more than guaranteed instruments again. They do the exact opposite of what you need to do in order to be a successful investor out of pure fear of being wrong, and cause their own worst financial scenario.

    You can never dispel uncertainty in life, it will never happen! You can control and mitigate your risks, which is most served at first by self control. When things look their bleakest in the market is where you can get the most gains, and when things look their sunniest is when the market is about the storm.

    I saved all the emails and posts of people in 2008 that were telling me to sell everything, or the market was going to collapse, or even that the US was going to end in a Mad Max style world. I kept my holdings that I had moved to less risky investments and started buying more aggressively. Most had 2 years of 50% gains, and another few of 20% gains, where even the stocks I had some losses at the beginning are well above my original investments. The people who told me to sell are out all that money and lost out on the gains in the market. They rage at everyone else for their poor decisions. Many claiming it will still happen…but each year their blood pressure rises when they are proven wrong.

  • Report this Comment On December 14, 2012, at 1:18 PM, grahamsway wrote:

    At least when it comes to investing, history seems to show that certainty is far more dangerous.

    In 1987, portfolio insurance was certain to protect on the downside.

    In 1990, commercial real estate was certain to make money.

    In 1999, internet stocks and their IPO's were certainly going to provide incredible wealth.

    In 2006, housing prices would certainly keep go up.

    Maybe a little uncertainty isn't so bad after all.

  • Report this Comment On December 14, 2012, at 5:46 PM, SkepikI wrote:

    Morgan- one of your worst. My advice is to take a deep breath, read Nate Silver's "The Signal and The Noise" (or read it again) and take another shot. This article is noise. How about something more cogent like your previous 5?

    How about one on the Fed and the bond market? Bubble or not? When they unwind (or wind up ha) do bond investors get the business end of a vicious rabbit punch?

    Or maybe review Nate's book - the foolish guide to Nate Silver.

  • Report this Comment On December 14, 2012, at 6:40 PM, bzhayes wrote:

    You go it all wrong Morgan.... There was less uncertainty in the past because we live in the future and we now know what the outcome of the past was.... We are 100% certain of the outcome of the past. Its the out come of the future that we don't know. That is why their is more uncertainty now than in the past!

  • Report this Comment On December 15, 2012, at 8:44 AM, TMFMorgan wrote:

    "Best article in a long time."

    "Morgan- one of your worst."

    I'll take the average.

  • Report this Comment On December 15, 2012, at 3:05 PM, SkepikI wrote:

    Morgan: What is the average of best and worst? This is a similar exercise to trying to pin down "uncertainty" using untested picked inputs no matter how smart the pickers, to an uncontrolled and untested tracking website. It contributes nothing to certainty (ha).

    "They do it by measuring mentions of "uncertainty" in 10 major newspapers and changes to the tax code. Its a really smart idea." Really? More like a really random idea untested for correlation to anything including uncertainty. While interesting, the graph has more resemblance to white noise than anything one ought to be testing conclusions against.

    And then there is the use (or misuse) of uncertainty to mean anything and everything that confuses, makes people nervous or simply provides an easy "me too" duck when trying to explain the unexplainable or the downright embarrassing opinion. Its much easier to cite "uncertainty" when you really mean "I'm pretty dang certain my taxes are going up in the next 3 years". Or " I'm just really nervous and don't like the situation we are in with the deficit and debt pile on" or "my girlfriend just left me and I'm heading for Rio" or a hundred other things you'd rather not explain.

    Perhaps your point is that "uncertainty" means nothing because its so misused and prolific. Pay no attention to those who spout "uncertainty" because its meaningless and not correlated to anything. OK, but not worth an article plus useless graph....

  • Report this Comment On December 15, 2012, at 9:28 PM, TMFBlacknGold wrote:

    I object. If we ban the word "uncertainty" then how will I enjoy Nassim's new books every few years?

    Have you read Antifragile yet?

  • Report this Comment On December 16, 2012, at 11:16 PM, whereaminow wrote:

    Nice timeline of government meddling in health care for the last 100 years.

    David in Liberty

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