The investment industry deals largely with uncertainty. In contrast, the casino business deals largely with risk. With both uncertainty and risk, outcomes are unknown. But with uncertainty, the underlying distribution of outcomes is undefined, while with risk we know what that distribution looks like. Corporate undulation is uncertain; roulette is risky. (page 11: More Than You Know–Mauboussin
Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect, but that is what it’s all about.” -Warren Buffett
Treasury Secretary Robert E. Rubin Remarks to the University of Pennsylvania Commencement Philadelphia, PA
5/17/1999
As I think back over the years, I have been guided by four principles for decision-making.
- First, the only certainty is that there is no certainty.
- Second, every decision, as a consequence, is a matter of weighing probabilities.
- Third, despite uncertainty we must decide and we must act.
- And lastly, we need to judge decisions not only on the results, but on how they were made.
First, uncertainty.
When my father was in college, he too had signed up for a course in philosophy with a renowned professor. On the first day of class, the professor debated the question of whether you could prove that the table at the front of the room existed. My father is very bright and very pragmatic. He went to the front of the room, pounded on the table with his hand, decided it was there — and promptly dropped the course.
My view is quite the opposite. I believe that there are no absolutes.
If there are no absolutes then all decisions become matters of judging the probability of different outcomes, and the costs and benefits of each. Then, on that basis, you can make a good decision.
The business I was in for 26 years was all about making decisions in exactly this way.
I remember once, many years ago, when a securities trader at another firm told me he had purchased a large block of stock. He did this because he was sure — absolutely certain — a particular set of events would occur. I looked, and I agreed that there were no evident roadblocks. He, with his absolute belief, took a very, very large position. I, highly optimistic but recognizing uncertainty, took a large position. Something totally unexpected happened. The projected events did not occur. I caused my firm to lose a lot of money, but not more than it could absorb. He lost an amount way beyond reason — and his job.
A healthy respect for uncertainty, and focus on probability, drives you never to be satisfied with your conclusions. It keeps you moving forward to seek out more information, to question conventional thinking and to continually refine your judgments. And understanding that difference between certainty and likelihood can make all the difference. It might even save your job.
Third, being decisive in the face of uncertainty. In the end, all decisions are based on imperfect or incomplete information. But decisions must be made — and on a timely basis — whether in school, on the trading floor, or in the White House.
I remember one night at Treasury, a group of us were in the Deputy Secretary’s Office, deciding whether or not the U.S. should take the very significant step of moving to shore up the value of another nation’s currency. It was, to say the least, a very complicated situation. As we talked, new information became available and new considerations were raised. The discussion could have gone on indefinitely. But we didn’t have that luxury: markets wait for no one. And, so, as the clocked ticked down and the Asian markets were ready to open, we made the best decision in light of what we knew at the time. The circumstances for decision making may never be ideal. But you must decide nonetheless.
Fourth, and finally, judging decisions. Decisions tend to be judged solely on the results they produce. But I believe the right test should focus heavily on the quality of the decision making itself.
Two examples illustrate my point.
In 1995, the United States put together a financial support program to help Mexico’s economy, which was then in crisis. Mexico stabilized and U.S. taxpayers even made money on the deal. Some said that the Mexico program was a good decision because it worked.
In contrast, last year, the U.S. supported an International Monetary Fund program designed to strengthen the Russian economy. The program was not successful and we were criticized on the grounds the program did not succeed.
I believe that the Mexican decision was right, not only because it worked, but also because of how we made the decision. And I believe the Russian decision was also right. The stakes were high, and the risk was worth taking. It’s not that results don=t matter. They do. But judging solely on results is a serious deterrent to taking the risks that may be necessary to making the right decision. Simply put, the way decisions are evaluated, affects the way decisions are made. I believe the public would be better served, and their elected officials and others in Washington would be able to do a more effective job, if judgments were based on the quality of decision-making instead of focusing solely on outcomes.
Time and again during my tenure as Treasury Secretary and when I was on Wall Street, I have faced difficult decisions. But the lessons is always the same: good decision-making is the key to good outcomes. Reject absolute answers and recognize uncertainty. Weigh the probabilities. Don’t let uncertainty paralyze you. And evaluate decisions not just on the results, but on how they are made.
The other thing I’d like to leave with you is that you will be entering a world of vastly increased interdependence — one in which your lives will be enormously affected by decisions made outside of our borders. We must recognize this reality and reject the voices of withdrawal to face the challenges of interdependence. Then, we can realize the immense potential of the modern era, for our economy and our society.
You’ve just completed an important milestone in developing your ability to deal effectively with the complex choices of the world in which you will live and work. By continuing to build on this foundation throughout your life, you will be well prepared for the great opportunities and challenges of the new century.
Congratulations and good luck.
