Asset Management

Investors must embrace uncertainty to beat the markets

It may not come naturally to humans but those happy to admit they could be wrong tend to make better active fund managers

Investors must embrace uncertainty to beat the markets
Photo: Getty Images

Everyone likes to be certain. It feels more comfortable than feeling uncertain and has protected us through evolution. Are you uncertain there’s a crocodile in the watering hole? Best to move on and drink from the pond next door you’re certain is safe. But while this rationale kept our ancestors alive, it does not bode well for decision-making through uncertainty.

Shying away from uncertainty actually drives us towards irrationality. Researchers discovered that receiving 17 weak electric shocks and three strong electric shocks, was scarier for their volunteers than receiving 20 strong shocks, based on factors like heartbeat, perspiration and breathing. The volunteers preferred the certainty of the 20 strong shocks, even though this was the more painful option.

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