Planning Advice From Nobel Laureate Kenneth Arrow

So as I have done many times, I went to my library to look for some reassurance. From the bookshelf, I pulled down my copy of Against the Gods, The Remarkable Story of Risk, authored by Peter L. Bernstein. In chapter twelve, entitled The Measure of Our Ignorance, which seemed appropriate given the number of people who had already measured me on their own scale of ignorance, I was introduced to Kenneth Arrow.

This is the story, told by Peter Bernstein and Kenneth Arrow, which had such influence on our approach to portfolio management:

Early on, Arrow became convinced that most people overestimate the amount of information that is available to them.  The failure of economists to comprehend the causes of the Great Depression at the time demonstrated to him that their knowledge of the economy was “very limited.”  His experience as an Air Force weather forecaster during the Second World War “added the news that the natural world was also unpredictable.”  Here is a more extended version of the passage from which I quoted in the Introduction:

“To me our knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness.  Vast ills have followed a belief in certainty, whether historical inevitability, grand diplomatic designs, or extreme views on economic policy.  When developing policy with wide effects for an individual or society, caution is needed because we cannot predict the consequences.”

One incident that occurred while Arrow was forecasting the weather illustrates both uncertainty and the human unwillingness to accept it.  Some officers had been assigned the task of forecasting the weather a month ahead, but Arrow and his statisticians found that their long-range forecasts were no better than numbers pulled out of a hat.  The forecasters agreed and asked their superiors to be relieved of this duty.  The reply was:  “The Commanding General is well aware that the forecasts are no good.  However he needs them for planning purposes.”

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Disclosure: Anderson Griggs & Company, Inc., doing business as Anderson Griggs Investments, is a registered investment adviser.  Anderson Griggs only conducts business in states and ...

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Cyrus Smith 2 years ago Member's comment

Thank you Kendall for the very interesting food for thought. Advances in tech have indeed significantly improved efficiency and time required to complete a number crunch. However, information still needs to be parsed appropriately.