During their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discussed Uncertainty And The Precautionary Principle. Here’s an excerpt from the episode:
Jake: Hopefully, that you guys have been talking about something that might be somewhat tangentially related to the idea of uncertainty, because that’s what we’re going to get into today.
Tobias: We’ve been plenty uncertain. Don’t worry about that.
Bill: I was going to make a similar comment.
Bill: Look at that.
Jake: We’ve got 15 guys worth of uncertainty on a three-guy call.
Bill: That’s right.
Jake: So, I thought it’d be interesting to ask you, guys, do you think that today feels more or less uncertain than normal?
Tobias: I’ll buy it more, even though I know that the answer is– That’s not true. I know that feeling is not true. The feeling is not right, but I do feel that way.
Bill: Yeah. I have been doing a little bit of research on the 1800s, and fire insurance, and I would argue that today probably is more certain. But I agree with the feeling.
Tobias: [crosstalk] I said more uncertain. I’m going the other direction to said more– [crosstalk]
Bill: Yeah, I think I know where JT maybe is going. I agree with you that it feels more uncertain, but it’s probably just in line with history.
Jake: No, this is a subjective thing. So, it wasn’t like there’s no right or wrong answer here. But what I did– [crosstalk]
Tobias: Still going to wrong, God damn it.
Jake: But also, you’re wrong.
Bill: We both miss.
Jake: I thought it would be helpful then maybe to look at– Gary Klein, he has five sources of uncertainty. So, I thought maybe if we dug in a little bit as to what can lead to uncertainty. Maybe it’ll help us to describe almost like emotions where probably the better that you do of putting words to them, the more you understand them. So, number one is missing information. Number two is unreliable information. Number three is conflicting information. Number four is noisy information, and number five is confusing information. Now, if all five of those sounded basically all of the news flow that you and I [laughs] have to dip our toes into, I would agree with that. What do you guys think about that?
Tobias: Yeah, I like that framework. Conflicting is different to missing. Yeah, there’s a lot of conflicting information.
Bill: Wait, what do we have? We got missing, conflicting, confusing, and noise, and what?
Tobias: Yeah. There’s more uncertainty– The conflicting information, how long have we had two news channels that are just totally divorced from each other? It used to be one network television. There was one authoritative propaganda that’s straight– [crosstalk]
Bill: We used to get all our misinformation from one place.
Tobias: That’s [laughs] [crosstalk]
Bill: Now we get it from both sides. Very confusing.
Jake: That’s right. You can either be uninformed or misinformed. Those are your two options.
Bill: That’s right. Yeah, I generally like this. I can’t poke any holes thus far.
Jake: All right, let’s proceed then. One of the possible ways to deal with this uncertainty is called the precautionary principle. You guys heard of this one?
Bill: Yeah, negative.
Jake: The basic idea is that it’s a broad, philosophical, and often legal approach to innovation where there’s a potential for causing harm, but there’s not extensive scientific knowledge on the matter. It’s lacking at that point. So, it’s like, we don’t really know the answer which uncertainty. It really emphasizes caution, pausing, and reviewing before leaping into new innovations that may prove disastrous. So, one of the key tenets is that the burden of proof is about the absence of harm, and it falls on whoever’s proposing the action as opposed to those opposing it that have to prove that it’s not harmful. So, it’s like, you’re guilty until you prove yourself innocent.
In an engineering context, the precautionary principle goes by the name margin of safety. I think your grandma probably summarized it the best when she said, “Better safe than sorry.” That’s the precautionary principle, basically. Now, Nassim Taleb is a proponent of this principle, and he’s battled Monsanto about GMO crops and citing the precautionary principle specifically about it. If we don’t know, we need to be more careful, especially– [crosstalk]
Bill: Oh, that to the people that are starving. But anyway.
Jake: Well, so, that’s part of it. What he says is that it’s a mitigation against black swans of things that could prove to be completely ruinous, full zeros existential crises. Taleb, he’s skeptical of the traditional cost benefit analysis that you usually see because it doesn’t apply when outcomes have infinite costs. So, even a high benefit, high probability outcome that can’t outweigh necessarily the existence of a low probability, infinite cost option. This is what blew up long-term capital management.
Bill: One place I think that he and I would probably agree and we’d probably agree a decent amount because he’s smart and I’m not, and I just defer to him, but– [crosstalk]
Jake: Smart and you’re right.
Bill: Yeah. I think limited liability especially adds a kink to this. When you can make these bets that have massive payoffs to the upside, and then when you have just total shit happen and you’re like, “Oh, we’ll just fold the company up.” [crosstalk] Yeah, that’s right. That creates some real incentives that I don’t like.
Jake: Yes. So, on the show, we’ve talked about normal accidents what “normal accidents.” We talked about it in the context of nuclear meltdowns. And just a reminder of what that is it’s when you have a connected, tightly coupled, complex system, there’s just a greater risk of these errors that accumulate. They’re very benign errors on their own. But when they accumulate, and they connect, and then it spins out of control, it lead to these runaway nonlinear disaster outcomes. So, I think COVID snarling the supply chain is probably one of our good recent example that we’ve all lived through tightly coupled, just in time fragile. So, the precautionary principle is a useful antidote to a world that’s increasingly vulnerable in a lot of ways to these fragilities of normal accidents.
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