Why You Should Speculate

tl;dr

Speculation is making an educated guess. It is an opinionated take of how the future will look. A clear invalidation of this educated guess exists, meaning that one can know when the opinion was wrong. Speculation therefore needs to be differentiated from idealistic hopes for the future. In this essay I want to make the case for why adopting more of a speculative mindset reduces dissonance in oneself and contributes to a better understanding of the world. Further I want to put forward that focusing less on idealistic visions does not decrease the importance of morality.

What is an opinion anyway?

Words are important here to make sure we are talking about the same things. Language is an imprecise tool and I found this especially true in the realm of speculation. Three word salats I’d like to unpack here:

1. ‘opinion’: Confusing word, used differently depending on context
2. ‘speculation’ = ‘prediction’ = ‘hypothesis’: A statement about what the future will bring
3. ‘ideological statement’ = ‘political opinion’: A statement about what the future should bring

First, the definition of ‘opinion’ that I could find differs from the colloquial use of the word, which is annoying.
An opinion is “conclusion held with confidence but not substantiated by positive knowledge or proof” (src). So while opinions are not certain I’d like to define an opinion to have some predictive character that is rooted in the real world. In that sense they are quite synonymous with the terms ‘prediction’ or ‘speculation’.
So when I talked about ‘strong opinions, weakly held’, these opinions are speculations about what the future will bring. And it would be more clear to call it ‘strong speculations, weakly held’.
We have to contrast that with ideological statements which are based on an idea of morality or conviction but that have no predictive element. They are non speculative.

An easier way to say this is: Do not confuse ‘should’ statements with ‘is/will’ statements.

An idealistic statement like ‘people should stop using cars in the city centre’ might be based on a conviction that air pollution and climate change are dangerous and require action. The statement does not include any prediction on why and how that change will occur in the future. Contrast this with the ‘is/will’ statement.
A speculative statement like ‘no people will use cars in the city centre anymore by 2030’. There you have a prediction, a strong opinion about how the future will play out.

Now that we got through the semantics, let’s continue which is making the moral case for speculation.

Why is speculation good?

In short, because ‘you can be wrong’. That simple fact brings with it the might of the scientific method which was a true innovation and upgrade in human thinking. If you can be wrong you can also be right. If you cannot be wrong how would you know that you are right?
A simple example to illustrate. I say the stars will influence how high inflation will go over the next year. With a general statement like that I can always be right – somehow, as we will not have the same alignment of stars for hundreds of years. But would you trust my theory?
Funnily enough, and this is quite counter intuitive, validity of a prediction or hypothesis increases if that prediction can fail.
Another example: I say the widening of the central bank balance sheet increases inflation. Now we can look at the past and observe the current situation. We can build up a correlation and see that balance sheet expansion does not always come before inflation. But it does so most of the time. This makes it easier to trust my second statement, right?
We call this falsifiability, that ability to be wrong about a prediction (src).

Talk is cheap

If I cannot be wrong I am just talking. And talk is cheap. If I make a statement about a global conspiracy of elites controlling the world that cannot be disproven I’m not saying much. If I stand on a soap box and scream that ‘people should stop driving cars in cities’ that is not saying much. Idealistic statements, political opinions and other unfalsifiable theories have to be identified as such.

In financial markets there is a saying that encapsulates this quite well: “Do not tell me what you think, show me your positions”. Positions here refer to the trades the person has put on. Meaning what speculations they are actively pursuing with money, e.g. betting on Amazon instead of Ebay.

Just to drive this home, another example:
You assume that a past pandemic will lead to people looking to live healthier lives. You tell all your friends about your opinion. You wait two years. It does not happen. There is dissonance between your expected outcome and reality. Nobody is going to blame you for it, you are probably not going to be thinking about it much.
If instead you started a business on top of that assumption, like opening up a healthy restaurant, you might be more honest with your reflections. You have to be concrete in your prediction that healthy restaurants will be very popular instead of burger joints. You wait two years and no customers come. And you read on the WHO website that the pandemic instead has caused dramatic rises in obesity instead (src). There are real consequences to your life. That is what speculation is about. It is about taking probabilities into account, embracing the potential of being wrong.

What does ‘being wrong’ mean?

If being wrong is so desirable, we should understand how being wrong works. Because it is more than a binary situation. You can be wrong in different facets of your speculation. In trading a prediction can be wrong in three major ways. You can be:

1. wrong in the direction of the prediction
2. wrong on the timing of the prediction
3. wrong in the size of the prediction

This adds some nuance to ‘being wrong’. Let’s go back to the example of the pandemic leading people to a healthier lifestyle. Taking that stance I could be wrong in three ways:

1. People on average actually become less healthy instead of more healthy (directionally wrong).
2. People on average only realise five years later that taking care of their immune system might be important (timing wrong).
3. People on average do not change much. Some get healthier but too many. The effect of the pandemic on lifestyle is negligible (size wrong).

What does ‘having something to lose’ mean?

Speculation is not just about the potential to be wrong. It is also about having something to lose. Betting ten Euros with a friend on who can jump further is an intuitive speculation. There is the monetary loss we can suffer, when betting with money. But we should not underestimate that there are different things to lose in speculation.

1. Money
2. Reputation
3. Optionality
4. Opportunity

Again, let us apply these to the example of the pandemic leading people to a healthier lifestyle. Being wrong about that trend could ‘cost’ me in different ways:

1. I spent a lot of money opening the healthy restaurant with no customers and no revenue (monetary loss).
2. I asked my friends to work with me, they trusted my instinct, borrowed me money and invested their time in the restaurant. Now they don’t trust my business instinct anymore (reputational loss).
3. I went all into the healthy restaurant. I worked 100% of my time on it and invested all my money. I said no to investing into a friends night club which is now working great (due to being wholly tied into one speculation I’ve lost the optionality of taking different bets).
4. I could have gone all in opening up my own night club. Actually I was on the fence between the two ideas (By doing one thing I occurred the opportunity cost of not doing the other thing)

A great book on this subject is ‘Skin In The Game’ (src). We know the concept intuitively, yet we often do not follow our own sayings. ‘Skin in the game’ refers to having something to lose. Speculation is taking risks and ‘putting money where our mouth is’.
The only real intention of opinions without expectation that they are true or valid is to be perceived as smart or intellectual. A lot of politics is talk without predictive quality. It is theoreticians making vague statements about how the country should change or respond to change. And when it's all set and done the politician will attribute outcomes in line with his previous statements to his political acts. But those outcomes that do not fit the narrative will be attributed to external forces, chance or will be downplayed in importance. You see how this is structurally similar to astrology, where being wrong is not in the cards.

Where is a place for politics or idealism?

Understanding the importance of making falsifiable predictions not just in scientific papers but adopting a similar mindset in everyday life is crucial. Adding ‘skin in the game’ makes the consequences of being wrong real, which is a great feedback loop to improve future predictions. Financial markets are a global implementation of these principles in action. Losing money due to a wrong speculation makes you humble. It shows you very clearly that you were wrong and in which of the three ways.

Surely there is a place for political opinions and idealism. The important part is to be self aware when making an idealistic statement. The issue is that we keep mixing the two types of ‘opinions’ and that is harmful. Because it confuses reality with fiction. If I believe no more cars in city centres are a good thing (which I do), then I have to be very aware that that is very different than putting down ten thousand euros to bet on the fact that there will be no cars in cities by 2030. If we put it in such explicit terms the difference is intuitively clear, yet we are not so explicit in daily life. We make mixed statements where we interweave our view of what the world ‘should’ be like into our prediction. We extrapolate some milkshake of emotional and predictive analysis – an ‘idealistic prediction’.

The role of political opinions and idealism is to communicate about ideas. When we explicitly make ‘non predictive’ statements we communicate about values and a moral. And it would be foolish to underestimate the power of ideas. If an individual or group has enough power to influence the world with their political opinions these ideas might penetrate the real world. Idealism is a real force in the world.

Speculation in turn is not an attempt to change the world but to understand it. It is to make predictive statements about the real world with a concrete point of invalidation (falsification).

Mixing the two into ‘idealistic predictions’ confuses us, as it is a political opinion that pretends to be a prediction of what the future will bring. It leads to a dissonance between expected outcomes and reality. And that leads to disappointment. We should not be disappointed that we still have war in the world in the decades to come. We can talk about the idealistic idea of peace and love but avoid to mistake these with a predictive statement. The world does not change in lockstep with our ideas. Markets will teach you otherwise and that can be a hard lesson to learn.

Summary

The moral case for speculation is that it reduces the level of bullshit in the world. Taking opinionated bets is taking the risk of being wrong. To add skin in the game to those bets, meaning having something to lose adds accountability. Therefore you are going to have less opinions and be more humble about what you don’t know.
What should happen is an expression of values. What is going to happen is an expression of predictive analysis. If you cannot differentiate your thinking between what ‘should’ and ‘will’ happen you’ll be frustrated as the world does not develop towards your ‘shoulds’. There is a place for idealism to express ideas. But you should be careful not to confuse ideas with reality.
A mismatch between expected reality and actual events needs to lead to adjustment. If you speculated on healthy post pandemic people and you got the opposite, that requires a look in the mirror and reviewing how you got to that prediction.
The Market does not care about your opinion. I’m using financial markets here because they are the purest implementation of speculation but the same applies to dinner parties. Wherever opinions are voiced I hope you can now differentiate between ‘idealistic opinions’ and ‘predictive opinions’ and annoy the other party guests with the theory of falsification. And of course, more importantly, use this framework to critically review your own thinking. Consider asking yourself every now and then:
Do you want to be virtuous or do you want to be right?
For me speculation embodies the courage to make predictive statements, the brutal reality of being wrong in more than one way and the humility to adjust. To learn from past speculations and deploy proper risk management to not lose it all in one bet.