The Value Creators Podcast Episode #2. John M. Jennings: Mental Models Are The Uncertainty Solution

In a complex world full of uncertainty, all businesspeople and entrepreneurs can draw guidance from shared mental models that help us make better choices. John M. Jennings took this advice to heart and developed a latticework of mental models for financial investing and any other business discipline, which he explained and expanded on in his book The Uncertainty Solution: How To Invest With Confidence In The Face Of The Unknown.

John is a premier thought leader in the wealth management industry and President and Chief Strategist of St. Louis Trust and Family Office, a $15 billion national investment firm. He is also an adjunct professor at Washington University’s Olin School of Business in its Wealth and Asset Management Graduate Program.

In this episode, he not only teaches why we always look for certainty and how we can be aware of certain pitfalls we fall into while dealing with uncertainty but also how to navigate uncertainty to not only come out unscratched but profit from it.

Show Notes:

0:00 | Intro

00:28 | Mental Models with John M. Jennings

1:39 | The Uncertainty Solution

02:25 | Defining Uncertainty

03:34 | Predicting the Future

04:35 | Defining Mental Model

6:08 | Unliking Uncertainty & How to Deal With It

8:48 | When Cause and Effect Don’t Work

12:37 | Extrapolating Trends

17:49 | Business Cycles

20:36 | The Result of Our Luck 

24:36 | Exponential Growth

28:42 | The Latticework of Mental Models

33:57 | Loss Aversion

36:38 | Overconfidence is the Mother of all Biases

41:20 | Wrap Up: Philosophical Advice from John M. Jennings


(Book) The Uncertainty Solution – John M. Jennings

(Book) Managerial Decision-Making – Max Bazerman

(Book) Scale – Jeffrey West

Knowledge Capsule

In his book, The Uncertainty Solution, John M. Jennings urges each of us to use a latticework of mental models to simplify the complexity we inevitably face. Here’s a summary.

A. Knowledge: Think of information in four categories: data, information, knowledge, and wisdom, and focus on knowledge or wisdom over data and information. 

B. The Quest for Certainty:

  1. Uncertainty: We dislike uncertainty as it causes stress and triggers our fight-or-flight response.
  2. Seek resolution: Resolving uncertainty brings pleasure, but we should recognize and sit with the discomfort instead of seeking closure.
  3. Avoid information overload: Resist becoming an information junkie or relying too much on expert predictions.
  4. Embrace discomfort: Sit in your discomfort and focus on what you can control. 

C. Looking for Causes in All the Wrong Places:

  1. Causation Is Tough to Determine: Assuming one thing caused another can be risky, as coincidence and multiple factors often play a role.
  2. Correlation Does Not Imply Causation: Strong correlation doesn’t mean one thing causes the other.
  3. Regression to the Mean: Extreme events tend to be followed by outcomes closer to the average.
  4. The Law of Large Numbers: Conclusions based on small sample sizes can be misleading; consider sample size whenever causation is asserted.
  5. The Highly Improbable Happens All the Time: Unlikely events occur frequently, so don’t be surprised and caught off guard. 

D. The Stock Market Is Not the Economy:

  1. Economic Growth vs. Stock Market: Economic and stock market performance are not always correlated.
  2. The Stock Market as a Complex Adaptive System: Predicting stock market movements is nearly impossible due to the interactions of intelligent agents.
  3. Economic Indicators Don’t Predict the Stock Market: Economic indicators and market signals often fail to predict market performance. 

E. Market Cycles and the Two Axioms of Investing:

  1. Markets Move in Cycles but Defy Prediction: Market cycles vary in duration and intensity, but no permanent plateaus exist.
  2. Economic Stability Creates Instability: Stability can lead to bubbles and crashes; opportunities arise when stability appears.
  3. Market Timing Doesn’t Work: Timing the market is challenging and requires being right twice—both at the top and bottom.
  4. It’s Okay to Invest in Advance of a Bear Market: Investing before a bear market can be fine if you follow a disciplined strategy.
  5. The Limits of Arbitrage: Being right doesn’t guarantee winning due to the market staying wrong for extended periods. 

F. Beware Experts Bearing Predictions:

  1. Economic and Stock Market Predictions Are Worthless: Investment predictions are often wrong, and investing without relying on knowing the future is better. 

G. Skill and Luck in Investing:

  1. The Skill-Luck Continuum: Luck plays a significant role in investing, and short-term results may not reflect skill.
  2. Most Investment Managers Underperform the Market: Most active managers underperform after fees, so consider the odds before investing with them.
  3. Most Stocks Underperform the Market: Picking individual stocks is challenging, and most fail to outperform the market.
  4. Monkey Portfolios Outperform: Following a different strategy than the market can yield better results, but it requires discipline. H. The Trend Is Not Your Friend:
  5. It Is Difficult to Spot a Trend Early: Identifying trends early is challenging, especially exponential growth.
  6. Trends Don’t Always Turn Out as Imagined: Established trends can change rapidly due to new competitors and technologies.
  7. It’s Difficult to Find a Successful Needle in a Haystack of Competitors: Picking winners among many competitors is challenging, and early pioneers may not be the long-term winners.

H. The Trivial Many Versus the Vital Few:

  1. The Danger of Using the Bell Curve in Investing: Relying on bell curve statistics may not capture the true nature of the stock market’s behavior, so be skeptical of advice based on such statistics. 2. The Stock Market Is Better Described by Power Law Distributions: Embrace the uncertainty provided by power law distributions instead of relying on projections based on the bell curve. 

I. Navigating Our Behavioral Biases:

  1. The Endowment Effect: We tend to overvalue things we own, including our investments.
  2. The Storytelling Bias: Stories strongly influence our decision-making, so be aware of how they can sway investment choices.
  3. Hindsight Bias: Looking back, we think we should have known the future but realize that infinite possibilities influence outcomes.
  4. Loss Aversion: Losses have a more significant impact on us than gains, leading to risk aversion and irrational behavior.
  5. Overconfidence: We often overestimate our knowledge and abilities, leading to poor decision-making. Recognize and mitigate overconfidence. 

J. Behavior—The Most Important Ingredient:

  1. Choose Inactivity Over Activity: Avoid excessive tinkering and market timing; maintain a long-term perspective.
  2. Prefer Simplicity Over Complexity: Start with a simple approach and add complexity only when necessary to avoid complications and fees.
  3. Establish Simple Investment Algorithms: Create an investment policy statement and follow simple asset allocation and rebalancing rules. These insights aim to provide a clearer understanding of investing and guide decision-making in the complex world of finance.
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