When the Only Certainty is Uncertainty
Some thoughts around quantifying the supposedly unquantifiable.
Are you hearing the word “uncertainty” as often as I am lately? Try an internet search limited to the last day, week, or month and you’ll see what I mean.
To be sure, I am especially alert for mentions of uncertainty, which I put in the subtitle of You Are What You Risk, published in 2021 amidst the pandemic. I often talk about the role of uncertainty in risk taking. Despite the distinction that the economist Frank Knight made between risk (a calculable probability) and uncertainty (for which even remotely estimating a probability is impossible), the two concepts are intertwined. While a calculated risk involves some analysis of probability, such estimates involve way more guesswork and uncertainty than most people would like to admit. Case in point: all of those “investment grade” structured finance products relying on subprime mortgages as underlying assets in, say, 2007-2009.
Uncertainty itself, when placed front of mind, has a huge impact on economic decisions, from households to businesses to investors. Under a US administration where uncertainty is an intentional feature, not an accidental “bug,” it’s impossible to understand what’s going on without taking into account uncertainty. Ironically, no matter how much it might cause Prof. Knight distress, that task involves efforts to, er, quantify overall uncertainty and its economic impact.
Amar Bhidé explores the impact of uncertainty on business in his new book, Uncertainty and Enterprise: Venturing Beyond the Known. Explaining how uncertainty shapes business decisions, he argues that successful ventures require leaders who can navigate uncertainty. He defines uncertainty is a mental state: “a condition of doubt about what is or could be.” It provides important context for business and economic decisions.
Ground Zero for Uncertainty in 2025
Control Risks put “The Uncertain States of America” on its Top Risks of 2025 list. “This incoming Trump administration will resemble – but not replicate – the first four years,” Control Risks analysts wrote. “This time Trump enters office more familiar with and prepared to use the full extent of presidential authorities. And he is surrounded by a more focused, if less credentialed, cadre of partisans willing to bend and break norms in pursuit of their objectives. While these factors will help cut through bureaucratic inertia that has stymied past reform movements, they are also recipe for rapid, unpredictable change. Businesses will need to fight for a seat at the table to ensure their interests are heard.”
JP Morgan’s David Kelly referred to the word in his insightful mid-January note on “Interest Rates, Inflation, and the Uncertainty Tax.” Analyzing potential drivers of the recent sharp rise in long-term interest rates, he noted higher inflation expectations and likely higher budget deficits. But he pegged the most significant driver as likely to be “deep uncertainty about what the incoming administration will do on tariffs, immigration and the federal budget and the knock-on effect of this uncertainty on the Fed’s willingness to continue to ease monetary policy.” He added: “Uncertainty acts as a tax on the economy not just by adding to the risk premia on bonds but by causing businesses and consumers to delay decisions. The most dangerous three words in economics are “wait and see”.
Uncertainty vs Threats
My friend Peter Atwater makes an important point in his February 22 comments on LinkedIn: investors are not just dealing with uncertainty but also with concrete threats. “As much as general uncertainty may bother us, we are generally disinclined to do anything about it. Its psychological distance makes it easy for us to ignore, discount, overlook, and recast,” he wrote. Uncertain times can go on and on before anything happens. Real threats are a different story. We must respond – and quickly.”
His well-taken punch line: “Today’s leaders need to better prepare their organizations for those potential moments when abstract uncertainty becomes a real threat. The current backdrop of widespread anxiety cautions such a moment is highly likely.”
I would add to his first point that not only are we generally disinclined to do much if anything to respond to uncertainty, we also are disinclined to make important strategic decisions, investments and more. Just how hesitant businesses, consumers, and investors become is essential context –particularly when it comes to economic policy.
We already have seen a number of real threats: ill-considered interruptions of government services, a US budget that increases the deficit while taking away resources from the people who need them the most in order to fund tax cuts for people who need them the least, a series of planned “economic blackout” consumer strikes, a fall in consumer confidence, international boycotts of American companies, and more. All of these result from policy choices designed to create uncertainty; in turn, they increase uncertainty, creating a vicious cycle.
It's worth exploring the context in which this dynamic is evolving. First: How uncertain are investors, policy makers, and citizens these days?
Uncertainty Measures
If you search Google Trends for uncertainty, you’ll find that in the week of February 16-22, global uncertainty was at 96, which is considerably above the five year low of 40 the week of December 16-22, 2024. It’s just a hair above the Covid high mark of 94 in September 2020 and a bit below the all-time high of February 2004, just after tracking began.
The Economic Policy Uncertainty project is a collaboration of professors at Northwestern University’s Kellogg School of Management, University of Chicago’s Booth School of Business, and Stanford University. Their daily US Economic Policy Uncertainty Index index, available via the Federal Reserve Bank of St Louis awesome data portal, FRED, covers around 1,500 US newspapers. The monthly version is based on media mentions in 10 leading US papers of a set of words addressing uncertainty, the economy, and policy, adjusted to reflect the changing number of newspaper articles and pages each day. It also incorporates tax code expiration data from the Congressional Budget Office and disagreements among economic forecasters compiled by the Philadelphia Fed.
Curious about how they came up with this approach? This 2016 Quarterly Journal of Economics paper explains it and puts it into context, noting evidence that [P]olicy uncertainty raises stock price volatility and lowers investment rates and employment growth rates for firms in policy-sensitive sectors …, and that these effects are large enough to matter for aggregate investment, employment and output.” There is, by the way, a whole academic sub industry on how to measure uncertainty. If you want to geek out further, here are some efforts.)
The US Economic Policy Uncertainty Index leapt from 357.99 on Thursday, February 20 to 490.76 on Sunday, February 23 after a stock market rout blamed, depending on whom you ask, on a drop in the University of Michigan’s consumer confidence index, higher inflation expectations, cautionary statements from US corporations, expiring derivatives contracts, and the discovery of a new coronavirus.
By way of comparison:
The index’s Covid-19 high on April 27, 2020 was 642.66.
The index hit 778.95 on July 5, 2024, amidst rising concerns in the aftermath of Biden’s dismal debate performance and before he dropped out of the US Presidential campaign July 21.
The highest recent level was 1026.38 on Tuesday, January 9, 2024 as a potential US government shutdown loomed.
The same folks also do a monthly Global Economic Policy Uncertainty Index, which ended January at 429.83, or just a hair’s breadth away from the March 2020 Covid-onset peak of 431.57
A more limited measure, the World Uncertainty Index, a collaboration of researchers affiliated with the International Monetary Fund and National Bureau of Economic Research, tracks the percent of the word “uncertain” and synonyms in Economist Intelligence Unit country reports. At the end of January 2025, it was at 41,383.2, compared to 56,223.6 in March 2020 at the beginning of the pandemic
Coming Very Soon…
So how is all of this uncertainty affecting consumers, citizens, investors, businesses, and policy makers? What scenarios might unfold as a result? Stay tuned.