Anil Gaba: How to Make Better Investment Decisions under Uncertainty
Anil Gaba, chaired professor of risk management at INSEAD, gave the CFA Institute Middle East Investment Conference a range of practical pointers to help navigate the difficult process of making decisions under conditions of uncertainty.
Gaba began by questioning popular usage of the expression “black swan,” the term coined by Nassim Nicholas Taleb to mean a rare event that is not only completely unexpected but also difficult to imagine in advance, in other words, suggesting we could be forgiven for failing to forecast it. Gaba is not so convinced that some events are totally unpredictable. Instead, he says he finds predictability everywhere, especially in finance and financial models, which he is almost weary of poking fun at. Complex models regularly have less predictive power to interpret uncertainty than even simple judgments.
Gaba argues that much uncertainty can be usefully reduced to “subway uncertainty” or “coconut uncertainty.” Subway uncertainty captures that part of uncertainty that is fairly predictable — for example, the quantity of water that will be used by Dubai or London between certain hours of the day or the prospects of catching a subway train on time. Statistical properties in subway uncertainty are well-known and fall into specified limits.
