September 6, 2023
Much of what I write here may seem to disparage all prediction. If that is the case, I need to clarify a few points.
Prediction is a very useful and necessary endeavor – when it is applied to predictable things.
Indeed, the scientific revolution, ever since the Renaissance, has steadily increased the sphere of human endeavor that is amenable to prediction. Beginning with astronomy, nature gradually revealed its secrets to very intelligent human beings. Chemical, physical, even biological processes, over the centuries, have become understandable and able to be predicted with a great deal of accuracy.
Alongside these scientific advances, and helping them along, were mathematical innovations that aided, refined, and sometimes even inspired these predictive approaches. Despite what many people might think, however, there is no necessary connection between the physical world and the mathematical world. As Stanisław Ulam, the mathematician and physicist, wrote in a remembrance of his friend and Los Alamos colleague John von Neumann, “The criteria of value in mathematical work are, to some extent, purely aesthetic.” Gödel’s Incompleteness Theorem showed that mathematics could never have the solid unimpeachable logical base of rationality that so many of its finest minds had always assumed must exist. And this also seems to render any reliable connection between mathematics and the physical world impossible.
This does not mean that math cannot be “made to work” for most of our practical purposes. It does, however, call into question the sometimes unthinking reliance on quantitative methods when trying to predict the future. And when one attempts to apply numerical algorithms to masses of humans, as though they were hydrogen atoms, one can run into some serious trouble.
The realm of the intersubjective reality is a particularly unpredictable sphere. Intersubjective realities (as detailed in Yuval Noah Harari’s books Sapiens and Homo Deus) are agreed-upon fictions. As Harari puts it, “Homo sapiens rules the world because it is the only animal that can believe in things that exist purely in its own imagination, such as gods, states, money, and human rights.” These imaginary objects, however, are not subject to the sorts of predictable physical laws we have been able to derive for hydrogen atoms, the movements of planets, inorganic chemical processes, etc. They can suddenly change. Religions can reform or disappear, as can nations, currencies, and social norms. They are unpredictable.
And unfortunately, the sort of stuff that we would most like to predict – the truly strategic issues – cannot be predicted the way we can predict, say, the return of Halley’s Comet. Financial markets SEEM as though they should be rational and predictable, but they are yet another of Harari’s useful fictions. Meanwhile, the stuff that CAN be predicted – physical processes, mostly – are of far less strategic interest, precisely because everyone, in ordinary circumstances, knows what will happen with them. Competitive advantage cannot be reliably gained as a result of things that everyone, in principle, can know.
An economist a century ago, Frank Knight, recognized this dichotomy, and to him it was the essence of entrepreneurship. On the one hand, there is “risk,” which everyone can calculate, in principle. This sort of uncertainty can be hedged, because everyone more or less agrees what its odds of occurrence are. You can pay an established price to rid yourself of “risk.” However, there is also what Knight called “that higher form of uncertainty not susceptible to measurement and hence to elimination.” This sort of scary uncertainty is the province of entrepreneurship. It is not strictly rational to take this sort of uncertainty on, Knight thought. In a 1957 preface to a new edition of Risk, Uncertainty and Profit, Knight wrote:
“Completely rational and informed behavior by everyone in a free economy would make money costs equal to selling prices and distribute the whole product among the productive agents participating. Universal foreknowledge would leave no place for an ‘entrepreneur.’ His [sic] role is to improve knowledge, especially foresight, and bear the incidence of its limitations.”
What might allow an entrepreneur to succeed despite lack of “universal foreknowledge,” and make “bear[ing] the incidence of its limitations” more bearable?
Imagination. Rigorous imagination, which gives rise to a superior vision of the plausible range of the future. The entrepreneur cannot know what is to be; but if she or he takes the time and effort to establish the full range of plausible outcomes within which she or he will have to work, she or he will be able to move forward with greater confidence, able to dismiss certain outcomes as being of less importance, while closely monitoring those identified to be of more critical import.
Once a vision has been derived, the way Steve Jobs derived his vision of the convergence of telephony, television, cameras, music and computing, then strategic foresight is possible.
In short: predict what you can predict; hedge the risk you decide you do not want to retain; and use rigorous imagination to anticipate the “higher form of uncertainty” that is not predictable.
