Beyond Certainty: Embracing the Unpredictable Universe of Financial Planning

Dune author Frank Herbert wrote, “Deep in the human unconscious is a pervasive need for a logical universe that makes sense. But the real universe is always one step beyond logic.”

I don't sell certainty, and no one else should either. Unfortunately, in many cases, that's what financial service providers peddle. Like television pundits, many advisors make a living by being opinionated and selling a view of the future based on an illusion of expertise.

As Herbert noted, humans crave order, and we resort to all sorts of cognitive ploys to eliminate a feeling of chaos. But despite sometimes suppressing that feeling, an unpredictable future looms. Pointing out this reality is not meant to invoke fear. Many of the unforeseeable events will be positive beyond our imagination. It's only to reinforce the truth that future certainty doesn't exist and shouldn't be traded like stocks, bonds, or commodities. 

In his blockbuster book Thinking Fast and Slow, Nobel Prize Winner Daniel Kahneman explains the two systems that control human thinking. “System 1” is fast, intuitive, and emotional, while “system 2” is more logical and deliberative. System 1 is the main character in Kaheman’s tour of cognition because it’s especially vulnerable to mental “glitches” that lead to poor decisions. 

One of these glitches is overconfidence, and it’s especially particularly prevalent among experts and pundits. Kahneman referred to a famous study by psychologist Philip Tetlock to demonstrate the “illusion of skill.” Tetlock interviewed over 280 people who make a living “commenting or offering advice on political and economic trends.” He presented possible future events and asked them to assess the probabilities of three potential outcomes. Some of these events were in the respondents’ field of expertise, and others were not.

The results were striking.

“The experts performed worse than they would have if they had simply assigned equal probabilities to each of the three potential outcomes. In other words, people who spend their time, and earn their living, studying a particular topic producer poorer predictions than dart-throwing monkeys who would have distributed their choices evenly over the options. Even in the region they knew best, experts were not significantly better than nonspecialists.”

This doesn’t mean we shouldn’t make predictions about the future — we must. But it demonstrates our predictive limitations, so we must approach financial planning and investing not as a search for certainty but as an ongoing attempt to be directionally right. 

I’m often asked about my views on the future of interest rates, market corrections, or the upcoming earnings of a specific company. Indeed, it’s fun to try and construct a forecast, but I know I’m not likely to be accurate — the world is just too unpredictable. My favorite economist, F.A. Hayek, touched on the impossibility of understanding complex systems: 

“Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones.” (Source)

To sell a client on a certain future would not only be unethical — I would be wrong. But that doesn't make financial advice worthless; it only highlights the importance of focusing on the planning process, not the plan itself. Guiding clients through important events, asking thought-provoking questions, encouraging long-term thinking, and reminding them about our cognitive “glitches” — that’s the value. That’s real financial advice.