Sometimes, what you did 20 years ago becomes oddly relevant 20 years later.

When I started grad school in 2003, I thought I would be a game theorist. I loved game theory because it’s the science of making strategic decisions under uncertainty. 

There is a direct bridge from that to investing. But shockingly, game theory seems more broadly relevant over the last few weeks.

I recently wrote a piece on LinkedIn called Investment Structure in the Age of Uncertainty. It made a simple point:

Whenever things are particularly uncertain, a little structure goes a long way.

Structure is what allows you to assess the potential impact of things on your portfolio.

Where I come from, we call that risk management.

And a little risk management can go a long way:

→ to calm nerves.

→ to feel more in control.

→ to make changes before it’s too late.

Now, to be clear, I think of uncertainty and her cousin, market volatility, as traveling not on one track but on two distinct tracks.

• There is “natural” uncertainty (which economists would call exogenous uncertainty, as in "coming from outside the system").

  • To state the obvious, the future is uncertain. Always and everywhere. Whether we like it or not.

  • We're just dealt some amount of unknown, with random "shocks" hitting us at random times.

  • Basically, comets fall out of the sky, seemingly out of nowhere, to us unsuspecting dinosaurs.

  
  

• Then there is “man-made” uncertainty, which happens when man decides to really get involved with things.

  • Economists call that endogenous because it comes from within the system.

  • That's when new chapters of history books spin out at a faster pace than normal.

  • This event leads to that action, which leads to that other thing.

  • Some events we get to forget about quickly.

  • Others we reckon with forever.

One is an act of G-d.
The other is an act of man.

To some degree, going through the trouble of sorting which is which is silly and superfluous.

The dinosaurs don't care that the comet was not a man-made drone.

They're gone all the same.

Same goes with your portfolio.

If your portfolio is UP OR DOWN 40% next year, it fundamentally just "is."

Who cares if nature or man caused the move?
The number's the number.

The real difference comes from how we react now to our perception of what may happen later.

The natural uncertainty is baked in.
We've internalized it.

Sure, if you watch Armageddon with Ben Affleck five times over the course of a single weekend—I don't recommend it—you may worry more about asteroids on Sunday than you did on Friday.

But my guess is the following Monday will look a lot like the previous Monday did.

The man-made stuff, on the other hand, can have a serious impact on future behavior… Let me explain.

Will We or Won’t We?

People have asked me about the potential impact of tariffs on the economy and on markets—that sort of thing.

The obvious stuff? Potentially higher inflation, higher interest rates, and a stronger U.S. dollar. All very possible, even probable, but the good news is that whatever it is, we'll find out together.

To me, the question might be more telling than whatever the answer is.

We are playing a huge game of "will we or won't we?"

As a result, things are happening that we aren't "seeing in the numbers" yet.

And these may impact the economy and markets just as much as the stuff you can see.

If you accept that interest rates drive economic decisions, there is a decent argument that, whether interest rates actually go up or not, we are going to behave as if rates are higher because of the heightened uncertainty.

→ And higher rates are the Econ 101 equivalent to "cool your jets, friend-o…"

Here is how that works.

Pretend that you sat down with "the American consumer"—or the "American business leader"—and you two had a chat.

And pretend you said to her: "I would like to know how you feel about all the uncertainty out there."

To make things more concrete, you would explain to her that participating in the economy is like having a shot at making around $1,000, but not exactly $1,000.

Because things are uncertain, it'll be $1,000, plus or minus $250, with equal odds, or

• $1,250 in the "lucky outcome" vs.

• $750 in the "unlucky outcome."

And then you would say to her that she could skip the whole uncertainty thing if that’s more comfortable for her, but it does require her telling you what she’d accept as a sure thing instead.

Assuming basic risk aversion, she’d probably settle for a no-uncertainty payoff of around $970 in order to skip the rollercoaster. Bird in hand, baby. Just keep the $30.

But then imagine you TURNED UP the uncertainty to $1,000, plus or minus $750 instead, with equal probabilities—or in other words:

• $1,750 in the "lucky outcome" vs.

• only $250 in the "unlucky state."

All of a sudden, your conversation partner might settle for closer to $660, not the $970 from earlier… which is, you know, a lot less money.

The bottom line is both simple and important:

→ Higher uncertainty basically leads you to settle for less.

(which is why amping up uncertainty is such an obvious negotiating tactic, by the way).

Settling for less is a lot like what you do when interest rates go up—not the same, but similar.

You probably didn't need all this silly math to get the point; I suspect you knew this in your gut and bones. But watch for this behavior in yourself and don't let it override the way you approach life these days.

As with every emotional response to the environment, take what's useful and discard the rest.

Hope this helps.

Be well,
Jonathan 👋

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