Episode 60: Fallacies and Certainties

Our need for certainty can be so overpowering that it will sometimes induce us to rewrite history. Some thoughts on this instinct, the problems it causes, and what we might do to improve it. 

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Transcript

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Welcome to The Sovereign Guide. I'm your host, Alistair MacDonald. Let's get started.

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One of the things about being inside our own heads is we're often blind to the privileges of our history. You have yours, I have mine, we all do. One of the deepest privileges of my history is a life that was rooted in uncertainty. From civil war to hyperinflation, asset collapse, corruption, implosion of the currency, political and social violence. I've experienced all of these and more. And what they do is they just imbue into you, almost code into your DNA, an absolute clarity about the illusion of certainty. It just doesn't exist. It occurred to me recently that I have lived through and witnessed in my life, back in my homeland, two entire cycles of freedom fighter becomes liberator becomes dictator and their demise. One more cycle, freedom fighter returns to liberator becomes dictator and their demise. Just inside my life. I speak at a lot of different events and I tend to select them according to one of two criteria. Either I know, work with, or really care about the person whose event it is and their tribe, their community, or I find the potential audience or domain or industry interesting enough to do that. I recently was the keynote speaker at a state CPA annual conference and I engaged with a room full of accountants because I had some points I wanted to make, some provocations specifically about EBITDA, and I thought it would be fun to go out there and sit in a room with hundreds and hundreds of people more qualified than I am about accounting to skewer the sacred cow of EBITDA. I was kind of disappointed but also a little bit warmed to know that the response I met was wonderful. Turns out I couldn't convince anybody of what I thought because they felt and thought that already. Wherever I feel it's appropriate for my audience, which is more often than not, I try to talk about large trends and cycles so that we can start anticipating how various things may play out. Every single business owner is in the forecasting business. You are making predictions every single day. When you hire that new team member, that's a prediction. It's a forecast of future demand. When you add a new manufacturing facility, you bring in a new op to your practice, you're making a prediction, a specific time-bound forecast that this chair, this facility, this employee, this new sales head will pay for themselves in X amount of time. There's nothing shocking about this, but what is shocking is how completely untrained we are in making business forecasts. In speaking about cycles and how they play out, I always try to guide my audience through past context, past data sets and so forth, to try to show them the cyclicality how they're likely to go from here, and I'm always met with some version of the same response. "So what you're saying is..." And that's typically followed by a binary assumption. "What you're saying is this ends in nuclear war. What you're saying is that there's a massive bust coming, or there's a huge boom." For example, and have been beating the drum for two years now about my bullishness about emerging markets, Asia in particular, hard commodities, and so forth. So speaking about those, immediately what you're saying is we're gonna have hyperinflation. I didn't say that at all. I've heard this for years from others, making sweeping grand statements of inevitable hyperinflation. That's a very, very bold statement, and statistically speaking, particularly for a global reserve currency, a very low probability Does it mean it's not gonna happen? No. It just means you cannot make statements like this with certainty. Just recently, I was giving a presentation on private credit. I was adding to, using data, the case that I have been making privately, at least with my clients and those I have the privilege of serving, that private credit is going to be the nest of our next credit crisis. Whenever that arrives, whatever mutations and manifestations and iterations it should deliver, I believe that it will be squarely beginning in and reflected to us, revealed inside the dark pools of private credit I laid out one of the first steps toward the demise of an industry, which is the manipulation of data. In the case of private credit, one of the largest groups known for analyzing and dispensing information, carrying indices about private credit, is a firm called Cliffwater. Cliffwater put out their end of Q1 results recently. And to assuage the fears of investors, they said, look at this.

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What we've got here,

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inflows and outflows into and out of private credit. Now, the problem with private credit is its illiquidity. You can see for any sort of student of finance, illiquidity is typically the tinderbox of any implosion. Think about mortgages back in the mid-2005, 2006 period. Part of this summary kind of state of the nation or state of the state of private credit were these analysts, these individuals at Cliffwater showing the inflows and outflows, as I say, of funds into and out of private credit. They were saying, yeah, look at this. Isn't it great? In Q3 and Q4 of 2025, funds were growing at 10% in terms of inflows, whereas redemptions were only 5%. What does that mean? Look, 5% going out, 10% going in. Can't you see it's super stable? This is wonderful. Now, I grabbed this to share with my audience, as I have shared with my private community, because the implications need to be considered immediately. Is this true? Yes, it is true. It is true that private credit is currently averaging redemptions of 5%. Does that match investors' desire for redemption? Because there's, of course, the investors' willingness or lack of willingness to stay invested that will dictate the explosion, implosion, or continued profiting of private credit's vehicles. Reasonable to say. Is it true that this 5% redemption represents what investors want? Well, we lift the hood and we realize this is not the case at all. In fact, that 5% is a gated 5%. By now, you've probably seen this all over the news, Bloomberg, CNBC, et cetera, saying the amount of money that is trying to leave private credit right now, dwarfing their actual redemption limits. In fact, some funds, such as those run by Blue Owl, BlackRock and Blackstone, KKR, Aries, all of the big juggernauts of private credit are seeing redemption requests. Some of them, twenty to forty percent of the assets. You have a hundred people in the fund and forty percent of them want out? How could this possibly be good for the industry? How does this end? Nothing scares an audience in a movie theater like locking the doors when they smell smoke, yet that's exactly what private credit has done. They have gated, this is called gating, the redemptions to five percent. So their data is accurate. Yes, it's true that only five percent are actually getting redeemed. The problem is it is one-eighth of the amount of people, in some funds, that wanna get out. Others, they're seeing redemption requests of ten or twelve percent and allowing five or six. Redemption requests of twenty, twenty-one percent in the case of another Blue Owl fund, and five percent. is it true? Yes, it's true. Is it all the information? Is it accurate or is it obfuscating a deep underlying rot? Well, you figure out how somebody's getting paid, you can pretty much guess the spin that will be put on it. So as I shared this, one of the audience members said, "Well, if you're talking about this bubble bursting..." Didn't call it a bubble. Do I think it's a bubble? Yeah, I kind of do. "Well, you're talking about the collapse of it." I didn't use the word collapse. I've heard other references in the opposite direction to my, as I say, my bullishness about, say, Latin American economies, Brazil, Chile. Super bullish on Chile, have been for almost three years. "Well, if you're saying Chile is gonna explode up to the, to the upside, none of those things need to be necessary. None of those things need to be true." What is this? This is an overwhelming need for certainty as reflected by the human instinct to come back with binary outcomes. Okay, so therefore this. Therefore, I should move entirely to cash. Wait, inflation's coming? I should move entirely to gold. This is what is passing for not just advice out there, but the standard thinking that we bring to what are actually extremely complex circumstances. For purposes of illustration, we can consider that there are three types of problems in the world, in our lives, and definitely in our businesses. There are simple problems, there are complicated problems, and there are complex problems. Our overwhelming desire to simplify the complex robs us of wisdom and insight to navigate the future uncertainty that we know is a part of our lives. It makes us dumber And we do this because to truly think through complex environments, complex problems, is cognitively taxing. It's also kind of inconvenient. Just tell me what to eat. Tell me what routine to follow. We can do that with simple or complicated problems. It is not hard to understand or to develop a plan to gain muscle mass and lose weight. That is not complex. It's a complicated problem, meaning it's made of multiple steps and components that, once aligned in a certain way, will produce a predictable outcome. No problem. But when we move that assumption into the environment of complex problems, as I say, we create not just problems for ourselves, but real problems with real risks rooted in intellectual laziness or the miscategorization of tools and problems. If you're anything like me, you were told as a kid in school that the assassination of Archduke Ferdinand caused World War I. Is that actually true? Any reasonable student of history will know that in fact Europe was an unbelievably complex web of secret treaties, alliances, deception, crumbling empires, arms races. That's what was going on. In fact, go back to nineteen twelve, nineteen ten, nineteen fourteen in Europe, you'll see that the system was actually disposed toward war. The assassination was simply the spark on the dry tinder of the entire context. The system was disposed toward this. I hear all the time, "Oh, well, when the planes hit the building, September eleventh, man, it caused the tech bubble to burst, the recession, my uncle lost his job." Is this true? Well, we know the date of the September eleventh attacks, but was that actually the catalyst that burst the bubble of the dot-com era? Not at all. In fact, the market itself, the tech bubble, peaked in March of two thousand. Fully eighteen months before the planes hit the building. Not just that, but the actual recession began in March of two thousand and one, six months before the events Not just that, but the recession ended six weeks after the planes hit the building.

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So let's pause on that for a moment to try to make this insight a little more practical, a little more useful. Let's imagine for a moment that you were a professional investor, that is now armed with the wisdom of hindsight, and you can get in your time machine and go back armed with all of the equipment that you might need, the capital, the wherewithal, the abilities to, say, take a short position against the market. Because of course, I would have said to you, "Listen, put you in your time machine, send you back to September 11th, and you could short the market the day before." So September 10th, you could put on a fully leveraged short position to capitalize on the decline that was massive at the time, just absolutely huge. To give you an idea of just how large it was, the actual market decline from its highs in March of two thousand to its lows of October two thousand and two was seventy-eight percent, one of the largest in the history of US equity markets. But let's get in this time machine, fly you back to September 10th. You bolt on a short position, and you hold on for the inevitable profits. Well, unfortunately, it turns out that of the entire seventy-eight percent decline, peak to valley, fully eighty-five percent of that decline occurred before September 11th, meaning the gains that you hope to make, you know, those career-making gains as a professional investor, would have limited you to just fifteen percent of the end decline, a fraction of the overall potential opportunity. I mention this not because I'm willing to offer you my time machine or because you are a professional investor. I mention it because this snapshot fallacy has real cost implications for us Real costs. Getting things wrong at this level of misunderstanding creates downstream negative outcomes that affect everything from our profit margins to our relationships to our employees' well-being and on and on. Let's assume that maybe I'm being a little too harsh and that that was anomalous. So okay, that's throwaway data. Let's fast-forward a few years into the global financial crisis. Everybody knows that Lehman Brothers going bust caused the financial crisis. I mean, don't you know that? It's now widely reported. Once again, we have to ask ourselves, is it actually true that what was clearly, in my mind and experience, a process was in fact simply an event? Let's look at the data. Lehman Brothers declared bankruptcy on a Sunday morning, that's worth speaking about in a separate podcast, on September 15th, 2008. The NBER, the National Bureau of Economic Research, who dictates and decides when official recessions begin and end, tagged the beginning of this financial crisis caused by Lehman Brothers as actually having begun in December of 2007, ten months before Lehman declared bankruptcy. Once again, if you had waited for that event to adjust your professional, whether it's investing or business strategy, you would have missed the bulk of the time you had to prepare as markets were deteriorating. The fire was already burning through the mortgage-backed security market, the credit markets, the housing sector for months, actually eleven months. So what do we do? Well, we grab the snapshot fallacy because it gives us a chance to wait for Lehman Brothers to basically give us permission to be certain that things are bad. And that's exactly it. Faced with uncertainty, we just white-knuckle it until some version of certainty arrives, even if that certainty is inevitable decline, inevitable implosion, inevitable nuclear bombs, whatever the case might be. This is flawed reasoning If we wait for the event to change our business strategy, you would have already sat through the bulk of the worst outcomes already, all the while telling yourself everything's fine because no event had happened yet. What's going on here? What is this? What this is, is false causality. It's the logical fallacy of after this, dot, dot, dot, therefore because of this. Because Lehman Brothers collapsed just before the market bottomed, we assume it caused the bottom. We willfully ignore the months of process leading up to it. This is what Nassim Taleb of Fooled by Randomness calls the narrative fallacy, our completely limited ability to look at sequences of facts without weaving some sort of explanation into them, some narrative that captures it so that we can pin it to something. Why? Because we hate randomness. We can't handle slow decay, and so we create some story with a beginning, Lehman Brothers, September 11th, a middle, crisis, and an end. Oh, closure. Some will refer to this as an availability heuristic. What's available to us is the data of the specific events. This is the whole boiled frog conundrum. We overestimate the importance of information that's vivid or easy to recall and let go of everything else. A massive bankruptcy, for example, is a vivid snapshot, but a six-month slowdown in subprime mortgage performance, that's a boring process, and our brain just filters it out. We've got other things to do and worry about. So why is this snapshot so seductive to the human brain? Well, we're touching on a deep truth here about the whole notion of certainty, which I'll remind you is actually just a feeling. It's just a feeling. You'll see this more and more in the news as the cycle rolls over. Investors are seeing these risks of heightened uncertainty. Nobody wants to say people feel weird. It's all it is, certainty and uncertainty. They're just feelings, and we come to those feelings by the actions and beliefs that we have about our capabilities. The greater your data set, if your data set includes, for example, hyperinflation, asset deflation, currency implosion, civil war, like mine does, you've got a broad data set into which you can place your skill set, and you can look at it and say, "Well, I've actually navigated these different environments or some version of them, giving me confidence in my abilities going forward." That confidence creates a rise, is of course an offset to the uncertainty, and suddenly I'm off to the races. This need for certainty is just to save us brain energy If you think about it, handling and actually processing what is a process in our mind is computationally, certainly cognitively expensive. You've got to track all sorts of variables over time. You've got to understand feedback loops. But more than anything, you've got to learn to accept ambiguity. Processing a snapshot is cheap. It's one image, one villain, one event. When we assign a simple reason, say Lehman Brothers, to a complex problem, global financial crisis, the entire planet's financial ecosystem doesn't get any more complex than that. We just satisfy this biological need for closure, some form of closure, even if that closure is actually untrue, and not just that, not helpful. It does not advance our knowledge and therefore our results going forward. Processing a complex system like the global economy requires a huge amount of mental energy, whereas distilling it down to a single villain or an event is cognitively super cheap. This also allows us to align ourself with others in a tribe, and we do this. The moment we are faced with uncertainty of some kind, we look to aggregate and get together with others, if for no other reason to commiserate. We commiserate with others in our clusters of uncertainty. This is really valuable because we've now at least got an in-group, out-group, which is as old as the limbic system. But there's something else about tribes and being able to point to characters or events rather than processes. You cannot sue or fire or evict or subpoena a process, but you can blame an event or a person, as I say, a villain. Our entire legal social system, economic, financial system, in our minds at least, are built on this idea of causal accountability, particularly our legal and social systems. Causal accountability, not dispositional management. What do I mean by that? When we understand the difference between simple and complicated problems compared to complex problems, we realize that the best we can hope for Is to move toward an ability in complex situations to pay attention to dispositions. How are things disposed or predisposed to work out? This means dynamism. This means creativity over static rules-based expectations that we place on others and of course embed in our own minds. Friends, what I'm saying is, is that you do this all the time, and it's super expensive. I routinely say to my clients that whenever I am faced with a binary choice or a binary outcome, I know that creativity has died somewhere upstream. Thanks perhaps to my upbringing, certainly my data set, which is pretty comprehensive in the range of possibilities of human social behavior, I expect many, many possible outcomes. I am supremely comfortable in areas and environments that others would consider high uncertainty, and I wish the same for you. This allows a level of clarity and focus and action orientation that has been so beneficial to me. My goal would be to save you the civil war, the hyperinflation, the unnecessary divorce or partnership breakdown, simply because you are either without a broad enough data set or without the instinct, the awareness, or the ability to open up to the possibility that these are complex problems that we're facing, and the best that we can hope for is to manage them. There's a beautiful old quote by Shimon Peres when he said, "If you have a problem for which there is no clear solution, you don't have a problem, you have a fact, one that you simply need to deal with." It's an old quote of his that I came across over a decade ago, and I loved it right away because it seemed to describe to me areas of my own choices and circumstances where I was inviting unnecessary brain damage into my life, thinking that the complex could be simplified or even the complicated could be simplified. The latter is a lot easier than the former. As we evolve through the life cycle of entrepreneurship, we notice that at the early stages, our problem set is defined by the capabilities we have Our specific skill sets. But as we start to try to build something that brings in other people, other products, other solutions, and other problems, we realize very quickly that our problem set is actually dictated by the capabilities of those we lead. And yet everything, the gurus in our industries tell us what to do, is to create a process for that. Just put a protocol together. Give them a script. What they need is a checklist. And we buy them. And we buy them. Just like a magical manual that finds itself sitting in a dirty old desk folder in the back of the storage room, not amounting to any significant change. We do this all the time. All of us do. We do this because we seek certainty in areas of high complexity. Hate to break it to you, but every process that you have in your business needs to be run by a person, and it is very rare that the system breaks down as much as the person driving it breaks down. It's very rare that you need to upgrade a protocol when the solution really is upgrading the either quality of the candidate driving the process or their personal skill set and abilities. It's typically the latter where the real problem lies. So what do we do? Well, a couple of things have made a huge difference for me. If it is true that as we grow and scale our enterprises and we realize that our problem set is not limited just to my hands-on skills, but in fact the capabilities of those I lead, then I have to come to terms with the fact that my job is to lead and to be smarter than the people that I have and the problems they work on. Meaning if I am truly trying to grow something, I need to grow them, and I won't do it with a process. If an employee has been working for you for five years using the same process every day that has produced the same results every day, you might feel like real progress is being made. But the truth is that's just one of the cogs, one of the gears in the deliverables of your business. It is not something that is oriented toward growth. But in any domain or realm where your business is expected to create and drive growth No process, protocol, or system will last very long. All growth is learning. If the systems, protocols, and processes in your business themselves are not learning then they are not growing. So we can audit for the type of problem that we have: simple, complicated, or complex. And when we do, we discover something remarkable, a superpower that has been hiding in the brains, minds, and stories of our grandparents. A skill that unfortunately only the elders acquire, and even then, not all elders. Only those that have been in, around, or playing the game for a long period of time seem to have in their possession. It's a skill that they've acquired by the accident of time that I'm inviting you to make deliberate and rapid. Pattern recognition. Pattern recognition. Pattern recognition is one of the only tools, in fact, somewhat of a superpower when it comes to dealing with truly complex problems. Because the outcomes are unknown and the best we can do is reduce the outcomes to a heightened small subset of probabilities, then it follows that we would do well to identify other versions of these problems in our lives. Grandma knows exactly where you're gonna go wrong with your sourdough baking because she's done it all of the wrong ways you have too. She knows the temptations you'll have to skip a step, hop forward, downplay one component, pay more attention to the stuff you love doing. Grandpa's gonna do the same. He will know all of the things that you're gonna do wrong before you finally stumble on the one that goes right, before you finally stumble on what actually works, because he too has done it. So how do we accelerate our pattern recognition? Well, there's a couple of ways that have made a huge difference for me. Number one, as I've alluded to several times, is to look elsewhere for different, larger data sets. Different or larger. We're so sure that our industry is unique, just as we're sure that, well, the American investor faces very different problems than a Japanese investor did. Really? Or is it in fact the problem that Japanese investors faced in 1989, in 1991? Isn't it true that human instincts the world over are just that, human instincts? So large data sets, different cultures, different time frames, different industries, different periods in history, looking for the cyclicality, the repeatability of certain elements, and the high and low probability outcomes that tend to follow. That's on the macro level. That's others' experience and data sets. But the real superpower is the same one that I actively encourage, endorse, and almost force my clients to do at least one week a quarter, which is to mine your own experience. Nobody knows about you like you. Nobody is really in touch with all of your weaknesses, your shortcomings, your insecurities, your strengths, your ambitions, your resources, your relationships, your networks. Nobody knows them like you do. Nobody is more valuable to you than you. But in order to extract that value, you're gonna need to sit down and reflect on it. Not just what went badly, but what went well and why. Let me deconstruct the elements of my current puzzle and problem and see where I might have come across those elements rearranged in a different way in the past. Mining your own experience is the accelerant to increased pattern recognition. That part of our brain, the reticular cortex, that helped us know the difference as Australopithecus afarensis between a red berry and a blueberry, between the roar of a lion and the howl of a hyena hiding in the bush. Pattern recognition, bigger data sets, cross-pollination from different industries, different cultures, different versions of the same problems, different results of the same combinations. In order to do this, you would do well to find yourself in a room where Your uncertainty is actually respected. Not just respected, but improved. What I mean is the instinct that we have whenever we're experiencing uncertainty is to seek it, even if it means in the hands of somebody else. We will rush to gurus. Cults explode in bear markets. In bull markets, we love icons of capitalism. Elon Musk, Jeff Bezos, pick your favorite hero. This desire for certainty has us driven in different directions all the time. Part of it is seeking the guru, the expert. Now, this expert could be qualified, maybe they're not, but to the extent that they are selling you on certainty, be cautious. I think one of the greatest gifts that a mentor could give to somebody who is grappling with a puzzle that's really complicated and fears that are embedded inside their assumptions is to say, "Actually, you're right to be concerned, but you're wrong to be concerned about this because there is a higher probability of this happening." Do you have anyone in your life that's pointing out that the things you're afraid of are unlikely to be the ones that ruin you? It's the things you're ignoring. Do you have a community that you're a part of where there is humility and authenticity of connection and contribution to each other? These are hard to find. You've been to these things. It's like a giant MLM. It's like a giant network marketing company. Everybody's jumping up and down to sell each other on the certainty of a system that only really profits a very small handful. What I'm talking about is having your fears qualified, having your concerns qualified. We all know that the bulk of the things that we're afraid of are not actually the things that harm us. Abraham Lincoln once said, "Our fears are always greater than our dangers." If you don't have access to or the instinct for gathering bigger datasets, getting exposed to different industries, find somebody who has, and find a community that invites that. Doing that for myself and for others has folded time and created value in ways I never imagined. Now, of course, you don't have to do any of this. Goodness knows your competitors are not. In fact, many are not ready for this. Many have not graduated to complex problems They're either stuck like a Roomba in the corner with their simple and complicated problems, and we all are to different extents in different areas of our lives, or entirely in love with them. We love our problems, and we especially love sharing them with others who have the same problems. We get to sit around and co-miserate. But to the extent that you're actually interested in moving into and onto new, more interesting, and more complex problems, you have to earn the right to do so by cleaning up the messes that currently damn you, the ones that frustrate you and pull you back into the machine, the simple and the complicated. They will own you if you choose, and there are armies of individuals that will complicate those things to keep you in their communities, under their leadership, buying their products, and so forth. Most will stay there for the bulk of their professional lives. But there is a small cadre of individuals that want to solve those problems not to beat their chest or to buy the extra new boat or the bigger house, but entirely so that they can move on to new, more complex problems. And those are my favorite humans to hang out with and work with. You get to choose what's best for you. Whenever you see binary choices, know that creativity has died somewhere upstream. Be one of the few, one of the brave. Go up and find it. That's where all the magic is.

Speaker 5 37:19

That's it for this episode. Thanks for being here. Hey, there's only two things that you have in your life, your time and your attention. That you've given both to me for these few minutes of today means everything. Cheers.