Investors are flying blind into the ‘Golden Age’

TEN years ago I praised a book by Mervyn King, former governor of the Bank of England, on the subject of “radical uncertainty”. Back then, I agreed with King that radical uncertainty – the kind that statistical analysis cannot deal with – was a pressing issue for financial regulators. After the extraordinary year just ending, the challenge is no longer so confined.

Over the past 12 months, the US has seen even every norm of economic policy – trade policy, fiscal policy, monetary policy – blithely tossed aside. At the same time, the US economy stands at the bleeding edge of what might be as consequential an economic revolution as the transition from farming to manufacturing, or from manufacturing to services – except that the artificial intelligence (AI) revolution could happen much faster.

Where will it lead? Everybody who claims to know is either lying or deluded. That is the point of radical uncertainty. The models that guide expert predictions rest on data that have never encountered shifts like these – certainly not all at once. Measures of risk based on established patterns are essentially useless.