DOI: 10.1002/ffo2.

122

COMMENTARY

Commentary on "Selecting futures: The role of conviction,

narratives, ambivalence, and constructive doubt" by mark
Fenton‐O'Creevy and David Tuckett

John Kay
St. John's College, University of Oxford, Oxford, UK

Correspondence
John Kay, St. John's College, University of Oxford, Oxford, UK.
Email: johnkay@johnkay.com

Keywords
financial markets, narratives, rationality, risk, subjective expected utility, uncertainty

Funding information
None

Almost exactly a century ago, two books were published (Keynes, 1921,
Knight, 1921) which sought to persuade economists to distinguish risk,
which can be described with probabilistic mathematics, from uncertainty,
which cannot. It was an argument that they lost as far as mainstream
economic thinking is concerned. In the 1940s Friedman and Savage
(1948) and Savage (1954), following von Neumann and Morgenstern
(1972), provided an axiomatic characterization of choice under un-
certainty which gave rise to an approach commonly labeled subjective
expected utility (SEU). Within 20 years, Friedman, who had succeeded
Knight as doyen of the Chicago school of economics, would go on to
write “I've not referred to this distinction (between risk and uncertainty
because I do not believe it is valid. We may treat people as if they
assigned probabilities to every conceivable event” (Friedman, 1962).
Subjective expected utility implies that individuals—and by ex-
tension organizations—make decisions as if they attached numerical
values both to possible outcomes and the probabilities associated
with these outcomes. Importantly, SEU does not claim that this
account describes the thought processes that give rise to these
decisions; rather it asserts that adherence to its axioms is definitive of
“rationality.” That claim is supported by the demonstration of Ramsey
(1926) that individuals who do not observe these requirements can be
“Dutch booked,” that is, induced to accept a series of gambles whose
net effect is sure to leave them worse off.
SEU underpinned the increasingly mathematical financial economics
that found practical application on Wall Street and in the City of London
and was employed in the prudential regulation of banks and other fi-
nancial institutions. Thus, the global financial crisis of 2008 invited a cri-
tical reappraisal of this approach to the analysis of uncertainty. The most
widely recognized critique came from “behavioral economics,” an appli-
cation of experimental psychology pioneered by Kahneman and Tversky
(1996). They showed that subjects repeatedly breached the axioms when
confronted with simple choices between gambles. But while the beha-
vioral economics of Allais (1953) and Ellsberg (1961) began as a critique of
SEU as a model of how agents made choices under uncertainty, in the
version popularized by Kahneman, it became a critique of human beha-
vior. Individuals were poor decision makers, subject to a wide range of
“biases.” Even if SEU failed descriptively, it retained its normative force.
However, a more fundamental critique disputes the claim that SEU
is mandated by rationality. It reasserts the claims of Keynes and Knight
that most uncertainty cannot usefully be described in probabilistic
language (Kay & King, 2020). When information is imperfect and un-
equally distributed, it is irrational even to hold, far less act on, sub-
jective probabilities of events and outcomes, which are often
incompletely specified and ambiguously determined. Individuals have
neither learnt nor evolved to be good at probabilistic reasoning
because probabilistic reasoning is not helpful in most real‐world
situations. Paradoxically, at first sight, the field in which such reasoning
is most readily applicable and for which it was first developed—the
gambling arena—is one in which most rational individuals
decline to participate.

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2 |
Kay and King re‐emphasize but redefine the distinction that
Keynes and Knight expressed as that between risk and uncertainty,
preferring to distinguish resolvable uncertainty—which can be re-
duced or eliminated by obtaining more information or specifying a
well‐determined probability distribution—from radical uncertainty,
which cannot. Noting that the term risk has become synonymous
with volatility in the language of financial economics, they prefer to
restore the meaning of the word in ordinary language. In everyday
speech, risk is the downside; risk jeopardizes the success of the fa-
vored narrative.
Thus, conviction narrative theory relates more directly to how
people report their decision‐making processes, and thus enables
them to make better ones. The interview studies of traders in fi-
nancial markets reported by Tuckett (2011) confirm the experience of
most people—that we cope with uncertainty by telling stories. Thus
conviction narrative theory offers an alternative account in both the
descriptive and normative realm.
But, as Fenton‐O'Creevy and Tuckett (2021) emphasize, con-
viction carries dangers as well as opportunities. Indeed one of the
few recent works to recognize the importance of narratives to
finance (Shiller, 2019) treats attention to narratives mainly as an
opportunity for irrational exuberance—as it has been in speculative
bubbles throughout history. Financial market participants seize some
event—often the development of a new technology—and, ex-
aggerating its short‐term impact, bid up the prices of related assets.
The profits thereby earned by early adopters of the narrative appear
to validate it. This process continues until almost no one is left to be
convinced, and at that point the bubble bursts.
Fenton‐O'Creevy and Tuckett correctly identify the dot com
boom of 1999 as an example of this process. But similar observations
can be made of the events which led to the 2008 global financial
crisis. Bankers and policymakers persuaded each other that the
proliferation of complex securitizations of debt instruments, in the
words of Federal Reserve Board Chair Alan Greenspan, “enhance(d)
the ability to differentiate risk and allocate it to those investors most
able and willing to take it” (Greenspan, 1999). When Raguthan Rajan,
then chief economist of the International Monetary Fund, warned of
the risks accumulating in the system, he was shouted down and
eventually left his post. Larry Summers, former US Treasury Secretary
and future adviser to President Obama denounced him as a Luddite
(Wheatley, 2013). Ultimately many of these securities proved to be
worthless and the scale of the resulting bailouts of major banks and
financial institutions was unprecedented.
In 2022, we are experiencing what may be the strangest of all
financial bubbles. Distributed ledger technology and blockchain have
been described as “a solution in search of a problem,” but skeptical
voices have been drowned by a crescendo of noise on social media.
Bitcoin is the first and still the best‐known cryptocurrency, but there are
now many hundreds of similar instruments. (A nonfungible token (NFT)
related to a jpeg created by a “digital artist” known as Beeple sold in
May 2021 for $69 million (Kastrenakes, 2021), giving tangible, or at least
electronic, reality to Tuckett's description of “phantastic objects”).
Special Purpose Acquisition Companies (SPACs), “undertakings of great
KAY
advantage but no one to know what they are” were launched, often
associated with the names of financial wizards including Jay‐Z, Shaquille
O'Neal, and Martha Stewart; these attracted funds from small investors
(Lipschultz, 2021).
And in a near‐perfect repetition of the 1999 process Fenton‐
O'Creevy and Tuckett describe, in which companies added to their
stock price by attaching “.com” to their names, the NASDAQ listed
Long Island Iced Tea Corporation achieved a near fourfold appre-
ciation in value in 2017 by changing its designation to Long Island
Blockchain Corporation (In 2021 executives of the company would
be charged with insider trading, having passed this supposedly ma-
terial price sensitive information of their intention to institute the
trade to associates) (Egan, 2021).
Conviction narratives are necessary if decision‐makers are to find
the courage to act in the face of radical uncertainty. But conviction is
not enough and excessive or unjustified conviction can lead to costly
mistakes unless the narratives are effectively tested in debate and
discussion. As Fenton‐O'Creevy and Tuckett describe, this process of
scrutiny must take place within the organization as well as in the
public fora associated with financial markets.
The concept of the mediating hierarchy, described in the con-
text of corporate governance by Blair and Stout (2001) is useful
here. The hierarchy of caricature, in which an executive like Henry
Ford demands control of every aspect of production—you can still
find Fordlandia in Brazil, where Ford established rubber plantations
to ensure that even the tyres were from his own trees—is over.
As happened at Ford, the resulting inability to challenge the
convictions of the leader is ultimately crippling. In the mediating
hierarchy, the role of the boss is not to tell everyone what to do but
to assemble views and clarify that a decision has been taken and
what that decision is at the end of a process of debate and nego-
tiation. This gives the opportunity for the organization to achieve
what Fenton‐O'Creevy and Tuckett describe as an integrated state,
which supports a central narrative while acknowledging the risks
and uncertainties associated with it.
The lesson for economics and finance is that the imposition of a
model of behavior deduced from a priori axioms not only fails to
provide a persuasive description of real decision making but has led
to policy choices that have imposed serious economic consequences.
Future research on decision‐making under uncertainty should be
more humbly inductive, rooted in observation of the processes that
yield good—and bad—outcomes.
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How to cite this article: Kay, J. (2022). Commentary on
"Selecting futures: The role of conviction, narratives,
ambivalence, and constructive doubt" by mark Fenton‐
O'Creevy and David Tuckett. Futures & Foresight Science, 1–3.
https://doi.org/10.1002/ffo2.122