I have been reading a very interesting book called Radical Uncertainty: Decision-Making Beyond the Numbers. The authors’ thesis is that people, companies, and governments place far too much faith in quantitative predictions and measures. The failure of predictions and planning lies in the inherent limitations in our understanding and data. This relates to Nassim Taleb’s concept of black swans but is more general. A black swan is an event that is essentially unimaginable, well beyond our realm of conception. While these are one form of uncertainty, there are many others. As the authors discuss, for example, a pandemic is something that people have conceptualized for years, so this is not a black swan (the linked article provides a nice summary of the authors’ general thesis). The probability and impacts of a pandemic are sources of radical uncertainty, however, because we do not have any way to meaningfully quantify or even conceptualize the range of possible outcomes.
The COVID-19 pandemic is changing the world in ways that will take years to fully understand. The probability and spread of COVID-19 is one type of radical uncertainty. Predicting the societal outcomes is another. Will we ever return to traditional work and school environments? Will we ever return to the scale of recreational travel in the pre-pandemic world? The longer the pandemic persists, the more I find myself thinking that we may be seeing permanent substantial changes in society. Here are a few that seem most impactful.
The ways that people work together will not return to pre-pandemic conditions. Companies are realizing that remote workers and teams can be highly effective. There are also direct economic benefits from having a remote workforce. First, of course, there is less cost associated with office space. Second, people spend less time commuting, which is a substantial perk in terms of time and money. Third, companies that are geographically dispersed are better prepared to deal with many types of disruptions such as storms, earthquakes, etc.
COVID-19 is forcing investors to conceptualize new sources of risk. We are experiencing events that may substantially alter the economic prospects of many different sectors of the economy. While the government can help companies and workers to weather COVID-19, this can hardly be considered viable as a long-term solution. The hospitality sector has suffered enormously and its hard to see how it will bounce back. While travel will recover, more people and companies will consider remote meetings as an alternative. COVID-19 can only accelerate the shift from bricks-and-mortar to online shopping. Professional services firms, many of which rely on face-to-face interactions, will probably shift towards remote interactions. I imagine that all companies will try to be prepared for future pandemics, and this will come at a cost.
It seems inevitable that COVID-19 will impact bond ratings. While the potential for a global pandemic is not a new threat, our experiences in 2020 will surely motivate investors to consider this situation more keenly. I imagine that investors will demand higher yields from companies in sectors that have experienced massive shutdowns in 2020.
It is useful to conceptualize radical uncertainty as to the future of society and financial systems. There are events that can suddenly and dramatically reshape society. I believe that COVID-19 is one of these situations. The dislocations of COVID-19 are changing how people work and the prospects for vast swathes of the economy. Assuming that we will eventually ‘return to normal’ seems ill advised.
Geoff Considine on Finance and Economics 