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Pandora’s Risk: Uncertainty at the Core of Finance resources

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3 Great Expectations Most fi nancial wealth aggregates future earnings that we can’t directly sample. We have to look backward into the future. In practice we discount heavily for tiny fears of disaster and prize perceived safety. It gives econo- mies a tremendous incentive to boost confi dence— sometimes beyond the capacity to deliver. Money symbolizes wealth at hand. However, most wealth isn’t at hand, and we couldn’t consume it now if we tried. It is a claim on future value. We can never mea sure future value. We can mea sure only past value, cur- rent trends, and expectations for the future. Expectations can’t be consistently right, because no one can predict the future. Expectations won’t be consistently wrong, because markets part fools from their money. We scramble between error and error correc- tion. It’s called learning. Learning rocks and rolls our wealth. Between 2003 and 2006, most Americans stopped saving out of income, because their houses and equi- ties saved for them. In 2008 $10 trillion of their wealth— and $50 trillion worldwide— vaporized, without war, hellfi e adjust- re, or alien invasion. Th ment was only on paper and electronic chits. Yet the material and psychic tolls have been enormous. Given the dangers, wouldn’t it be better to stop forming half- baked expectations and wait to invest until we know? No, it wouldn’t. We can’t know until we try. Besides, asset markets force us to choose. Whether we buy, sell, or pass, we implicitly compare the price to fair value and reveal something about our expectations. Th uences others at revelation in turn infl and helps shift the consensus view.

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