Heisenberg shows formulas don’t survive real-world uncertainty
In classical physics, as practised by Sir Isaac Newton, we learn that if you know a few key variables and apply force, then you can predict an outcome. The same is true for investing. Many investment advisers will tell you that by putting x amount aside you will get a return of y over time, which will be enough to fund your retirement. The investment world has some formulae to help arrive at these conclusions, the notable ones being Markowitz’s mean-variance portfolio theory and Treynor’s Capital Asset Pricing Model. These formulae have been widely adopted by the investment industry and have the beauty of being relatively clear, simple, and understandable for trainee financial planners. They are useful frameworks, but they are overly simplistic: they do not capture the complexities of life.
William of Ockham was a 14th-century English Franciscan monk and philosopher. He is best known for Occam’s Razor: given competing ideas, the one with the simplest explanation and the fewest assumptions is probably the correct one. This is intuitively pleasing and consistent with our desire to make sense of a complicated world. However, William of Ockham is also wrong; at least when it comes to investing, and probably a great many other things. The investing world is much more complicated than his Razor would suggest.
Instead of looking for inspiration from William of Ockham or Sir Isaac Newton, we should look to Werner Heisenberg, who you may know from Breaking Bad, The Big Bang Theory, or Michael Frayn’s famous play Copenhagen. The Heisenberg Uncertainty Principle, which is fundamental to quantum physics, says that simultaneously measuring the exact position and momentum of a particle is impossible. Quantum physics also teaches us that the very act of trying to measure a particle’s position or momentum can change the nature of that particle.
Similarly, in the investment world, the Uncertainty Principle might suggest that you may be able to estimate the valuation of a share or bond, but you cannot say when its price will move. On the other hand, you may know that a share has momentum, either up or down, but the more extreme the movement, the greater the doubt about its value. This is evident in shares such as Nvidia or GameStop, which moved so violently that many analysts struggled to value them consistently.
The idea from quantum physics that measuring something changes its nature is also true in investment markets. George Soros, the famous hedge fund manager, called this “reflexivity”. Investors’ acts of researching and trading can change a share’s nature: wide coverage of a share will likely lead to heavy buying, which in turn may cause a company to issue more shares and raise more capital, thereby changing its nature. This is certainly what happened to meme share GameStop, which was thought to be going bust; because it rose so rapidly to prominence during the COVID lockdowns, it was able to issue new shares, raise cash, and avoid bankruptcy, so much so that management started looking around for other companies to acquire.
A variation on this theme is Goodhart’s law. Charles Goodhart worked as an adviser when Margaret Thatcher’s government tried to target money-supply growth to contain inflation in the 1980s. He noted that the very act of the government using money-supply growth as a target seemed to make it ineffective as a predictor of inflation.
Keynes wrote his General Theory of Employment, Interest and Money about a decade after Heisenberg came up with his Uncertainty Principle. It is entirely possible that Keynes was aware of the Uncertainty Principle when he wrote his famous book. Keynes believed that the future is unknowable and that market prices are based on human psychology acting under uncertainty. He famously saw markets as being like a newspaper beauty contest: “Investors choose not the faces they personally find most attractive, but those they think others will think are most attractive”.
Despite this cynicism, Keynes believed a successful investor should ignore short-term market fluctuations. He saw these as reactions to uncertainty, and instead advocated investing for the long term. Blending this with ideas from quantum physics, perhaps it is best not to look for clear-cut answers or precise outcomes when investing. What matters is remaining humble and flexible in the face of uncertainty, and keeping our nerve, so long as our actions remain aligned with our objectives. In that context, experienced professional advisers can play a valuable role: not as oracles predicting the future, but as disciplined partners who help investors frame decisions, challenge assumptions, and maintain perspective when markets are noisy. Any predictions about the future are inevitably uncertain, based on a short slice of history, informed guesswork, and the hope that history will repeat itself. It never does – though it does, from time to time, rhyme.
Please be aware that the value of investments may go up or down and you may receive back less than you invested originally. Past performance is not a guide to the future.
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