The Uncertainty Tax
Why our relationship with risk is broken, and the impact that's having on our relationships.
Imagine 3 scenarios. An economy with:
No Risk or Uncertainty: Your relative overall wealth is perfectly correlated with your own behaviour - no other variables present whatsoever. At an individual level, inheritance, health, family situations, all completely irrelevant. At a societal level, no wars, pandemics or crashes.
No Uncertainty but Risk: Hard work and good decisions do generally lead to success, but there is say a 20% chance that, out of pure bad fortune your hard work doesn’t pay off.
Uncertainty & Risk: You think there might be at least some correlation between hard work and reward, but you have no idea what the odds are, and it seems like individual behaviour is one of the smallest factors when it comes to what drives success.
Compared to other generations, today’s ‘youth’ are faced with a heightened version of scenario 3. AI disruption, external shocks, low social mobility, a particularly challenging job market.
But worse, the perception - based on interviews in Dose of Reality - is that previous generations were faced with scenario 1. Wrongly or rightly, this, it feels, sits at the crux of the generational divide.
It’s not just 'they could buy a house’ or ‘they could get a job’, though there is that:
“When you were our age, housing and food shops were cheaper, and going on holiday or going to festivals was expensive. It’s now reversed for us, where we can afford to go to concerts, but we can’t afford a down payment on a flat. They just can’t seem to get it, and it just seems to be creating this bigger rift between us and them because they don’t get it. But it really does affect us day to day.”
It’s a sense that the system was working and stable for that generation, in a way it simply isn’t today (this, from a separate interview):
“They had capitalism at its peak, where a wage could sustain a family. That’s just not how it is anymore. And then they say, ‘Oh, you don’t want to have kids,’ or, ‘You’re so lazy,’ blah, blah. We don’t want to have kids because we can’t afford kids. We can’t afford to move out. And they say, ‘Oh, it’s because you buy coffee. It’s because you go to festivals or go to concerts.’”
It’s not just that there is a weaker link between individual action, and overall success. It’s that the link feels broken. “Capitalism at its peak”, ie in a world where hard work = reward, individuals are broadly responsible for their own success.
This sense of injustice, perhaps inevitably, then leads to ‘generational blame’:
“My eldest son, he really has got a problem with baby boomers. He criticises me and you, don’t we? He calls us boomers. That generation they see us responsible for fucking everything up, and why everybody is poorer as well. Excuse my French. So yeah, he’s very bitter about it, isn’t he?”
When one generation thinks that progress is inevitable as long as you make the right calls and put in the leg work; how do they explain their children having high debt, high unemployment, and high bitterness? An intergenerational divide feels inevitable.
“Fear is the path to the dark side. Fear leads to anger. Anger leads to hate. Hate leads to suffering.”
I couldn’t help but listen to these interviews and think of Star Wars. Which maybe says more about me than anything else.
I would maybe change it slightly though.
“Uncertainty leads to fear. Fear leads to risk aversion. Risk aversion leads to lack of growth. And lack of growth, leads to intergenerational resentment”.
Catchy?
Our sentiment scores show that when people talk about finance, for example, they are almost always negative and fearful, especially around savings and debt. When you ask why, it is invariably as a result of uncertainty about the future.
Behaviour driven by fear of the future rather than excitement about what it might hold, doesn’t lead to the ‘speculate to accumulate’ mindset necessary for capitalism to function.
And when a potential investment opportunity does come up, the overarching emotion is scepticism, with fraud dominating the conversation.
Occasionally someone will say something along the lines of ‘I have nothing to lose’ or ‘we had a windfall so thought it was worth a punt’.
The very highest earners can afford to take a risk. The very lowest earners have less to lose. The ever-growing middle seem to be increasingly risk averse. This leads to historically high savings rates just when we need people to spend more. It leads to lack of entrepreneurship. It leads to lack of long-term investment in education (which is a form of a gamble). It leads to short-term thinking - jam today is preferable to jam tomorrow!
The easy diagnosis is “risk aversion”, and the easy prescription is confidence. But the more of this footage I watch, the more I think the diagnosis misses something specific and important.
Risk ≠ Uncertainty
In 1921, the economist Frank Knight drew a distinction between risk and uncertainty, which I think is important to help us understand what’s actually going on.
Risk refers to situations where you don’t know the outcome, but you do know the odds. Dice, actuarial tables, a fixed-rate mortgage. Risk can be calculated, priced, pooled, insured against, and taken deliberately. On the other side sits uncertainty: situations where you don’t know the odds and can’t. The unknown unknowns, as consultants like to say.
The distinction matters because we treat the two very differently. In 1961 Daniel Ellsberg showed that people will consistently choose a gamble with known odds over one with unknown odds, even when the unknown gamble might be better. We are not merely loss averse; we are ambiguity averse. Under risk, we calculate and commit. Under uncertainty, we stall. We keep options open, hoard cash, and defer. This is what leads to precautionary saving, which rises in step with uncertainty about future income (reaching a historic high since 2008 last year, in the UK).
We have an uncertainty problem, not [just] a risk problem
The challenge that is perhaps unique to today’s young adults is intense uncertainty, more so than risk:
“[You] can’t get a job because AI has taken over... because of these genuine super evil villains…”
Nobody, including the people building it, can tell this generation what AI means for the value of their own labour in five years. Which degree survives? Which trade? Which specialism? There is no distribution to consult. And when you cannot price the future of your own effort, deferring commitment is a perfectly rational strategy. Don’t specialise yet. Don’t retrain (into what, exactly?). Wait and see.
AI does not need to actually take the jobs for the damage to land. The unknowability alone suppresses action today, whatever the future turns out to hold. That’s the uncertainty tax. It’s levied on the present, regardless of how the future resolves.
I included the second part of the quote because it speaks to a wider issue. We are all biased to reduce uncertainty. So when some uncertainty does exist, we are programmed to find resolutions, however conspiratorial they may sound.
Walking into different worlds
Let’s return to the generational divide.
The people now towards the end of their working lives came of age in a world dominated by risk in Knight’s sense. The route from qualification to career was stable, even if risks were involved. A house cost three or four times a salary. Debt beyond a mortgage was largely avoidable, which meant being in debt read as a verdict on the individual: you had chosen to live beyond your means. In that world, the playbook worked. Work steadily, avoid debt, buy a house. You could calculate, commit, and be rewarded, and plenty were. There was still risk involved, sure - but uncertainty was significantly lower.
Their children are walking into a world weighted towards uncertainty. Career half-lives are unknowable.
And then things like the housing arithmetic means individuals require a windfall, or live at home for longer, which increases the chasm
“I’ve got [my son] at home at the moment. He’s in his mid 20s. He’s a man now and I forget he’s a man, so we’re clashing... This generation he’s come from... they just expect... they weren’t brought up like me.”
The hosting generation is genuinely conflicted: real sympathy for how brutal the current market is, sitting alongside a nagging feeling that the adults in their spare rooms are being doted upon, shielded from insurance, finances, bills and the unglamorous plumbing of adult life.
A degree in England means starting adult life north of £40,000 in the red, while the family home now costs eight or more times a salary. Debt has shifted from an avoidable choice to, for many, a necessity. And under uncertainty, as Ellsberg would predict, the rational strategy is often inertia. The problem is that from the outside, inertia is indistinguishable from idleness.
And parents themselves are consistently encouraging their children to avoid racking up debt at university as a result:
“It’s pointless going to uni for that debt... unless you specifically want to be a GP. From a young age you’re like, I just want to be a doctor, I want to help people out, I’m willing to put the time and effort in, and the cost. Whereas some people go to uni and they pick degrees and don’t have a clue”
Set aside the eternal Mickey Mouse debate. What’s actually happening is that a generation whose instincts were forged under calculable risk is looking at an uncertain return on self-investment and actually counselling their children out of it.
Individual rationality is bad for society
The rational individual responses to today’s genuinely uncertain world are exactly what we observe: precautionary saving up, risk appetite down, commitment deferred, scepticism about the value of uni. Each household’s caution makes sense., but is clearly a recipe for economic stagnation.
And perhaps a hidden cost is the mutual incomprehension of generations who are walking into increasingly different worlds while often having to share the same kitchen.
Every growth agenda I read is about supply: planning, infrastructure, tax, skills. Burnham’s recent announcement to encourage more technical learning at a younger age makes sense in this uncertain world.
But we also need to try to fight for a more optimistic narrative that encourages young adults to take bets on subjects that might be ‘risky’: be that training in critical thinking, history, the arts in general.
Or we will be left with greater inertia, lack of growth, more intergenerational resentment (and a totally imbalanced workforce.)