Decision Making Under Uncertainty: God, Pascal and Logic

DECISION MAKING UNDER UNCERTAINTY

Should you believe in God? As per Blaise Pascal, if you are a “rational person” the answer should be YES. It is not a matter of faith, but logic.

Pascal argues that if you live a life consistent with the existence of God, there is limited downside but a large upside.

If God does not exist, the individual incurs only finite losses (sacrificing certain pleasures and luxuries) but if God exists, the gains are immeasurably large. So limited downside, and huge upside.

Basically, when under uncertainty, you are advised to use asymmetry to your advantage. Do not run away from losses or run towards gains blindly. Weigh the two together.

DO EQUITY MARKETS ALWAYS DO AS WELL AS THE ECONOMY? Nope.

Now when the whole world believes Sensex will reach 1 Lac soon, it is hard to not get carried along. But then, we know the fate of equity investors of China, Japan, The UK etc.  – pretty fine economies.

In fact, most of the equity markets in the world disappointed long-term investors. Does it cross your mind that our fate could be similar?

The US and India are probably the only large economies where equity markets delivered respectable returns. Indian equity markets now enjoy a God like status.

So Mr Pascal, should we believe in Indian equity markets?