By: Douglas J Utberg

Of all the information that is available in the universe, it is the information we don’t know that is the most important.  The reason for this is because things that we do not know are that which create the greatest risks.  Overpaid mathematicians who wear ties and have long titles develop elaborate models to coax their feeble minds into a false sense of security because of a statistical model that says their risk of failure is impossibly low.  The principal problem that these pseudo scientists continually fail to internalize is the fact that statistical models cannot incorporate the impact of risks that are unknown and events that have never happened before.  (Hence making them unknown)

The epic danger that is posed by the proliferation of this fundamental failure is the fact that large amounts of capital are managed based on these sketchy models.  The most prolific example is the banking system that recently collapsed because events transpired that were outside the realm of their models to predict.  Specifically, the simultaneous default of many homeowners that created a downward spiral in prices, which created forced de-leveraging, which depressed prices, and created more forced de-leveraging.

Naturally, the ‘genius’ solution dreamed up by the political class was to simply repeat the exact same behaviors that created the circumstances that precipitated the collapse in the first place.  These people are the same ones that continually advocate for investment in mutual funds that are managed by the same financial institutions that precipitate the asset bubbles that lead to these disastrous market collapses.  The popular iconoclast Nassim Nicholas Taleb has created a niche genre from his analysis of probability, uncertainty, and randomness.

As individual investors, we cannot directly shape the direction of government policy or financial institutions.  However, we each can choose to side-step the shell game of the financial institutions by becoming direct investors in small business ventures, or income producing assets.  This will help to insulate us from the madness of the pseudo scientists through direct ownership of our investment assets.