Will bond yields go up, or down, or remain the same? If you're a TV pundit and your job is to explain the outcome after the fact, then there's no reason to worry. No matter which of the three possibilities comes true, you'll be able to explain why the outcome perfectly fits your pet market theory . There's no reason to think of these three possibilities as somehow opposed to one another, as exclusive, because you'll get full marks for punditry no matter which outcome occurs.
But wait! Suppose you're a novice TV pundit, and you aren't experienced enough to make up plausible explanations on the spot. You need to prepare remarks in advance for tomorrow's broadcast, and you have limited time to prepare. In this case, it would be helpful to know which outcome will actually occur—whether bond yields will go up, down, or remain the same—because then you would only need to prepare one set of excuses.
Alas, no one can possibly foresee the future. What are you to do? You certainly can't use "probabilities". We all know from school that "probabilities" are little numbers that appear next to a word problem, and there aren't any little numbers here. Worse, you feel uncertain. You don't remember feeling uncertain while you were manipulating the little numbers in word problems. College classes teaching math are nice clean places, therefore math itself can't apply to life situations that aren't nice and clean. You wouldn't want to inappropriately transfer thinking skills from one context to another. Clearly, this is not a matter for "probabilities".
Nonetheless, you only have 100 minutes to prepare your excuses. You can't spend the entire 100 minutes on "up", and also spend all 100 minutes on "down", and also spend all 100 minutes on "same". You've got to prioritize somehow.
If you needed to justify your time expenditure to a review committee, you would have to spend equal time on each possibility. Since there are no little numbers written down, you'd have no documentation to justify spending different amounts of time. You can hear the reviewers now: And why, Mr. Finkledinger, did you spend exactly 42 minutes on excuse #3? Why not 41 minutes, or 43? Admit it—you're not being objective! You're playing subjective favorites!
But, you realize with a small flash of relief, there's no review committee to scold you. This is good, because there's a major Federal Reserve announcement tomorrow, and it seems unlikely that bond prices will remain the same. You don't want to spend 33 precious minutes on an excuse you don't anticipate needing.
Your mind keeps drifting to the explanations you use on television, of why each event plausibly fits your market theory. But it rapidly becomes clear that plausibility can't help you here—all three events are plausible. Fittability to your pet market theory doesn't tell you how to divide your time. There's an uncrossable gap between your 100 minutes of time, which are conserved; versus your ability to explain how an outcome fits your theory, which is unlimited.
And yet... even in your uncertain state of mind, it seems that you anticipate the three events differently; that you expect to need some excuses more than others. And—this is the fascinating part—when you think of something that makes it seem more likely that bond prices will go up, then you feel less likely to need an excuse for bond prices going down or remaining the same.
It even seems like there's a relation between how much you anticipate each of the three outcomes, and how much time you want to spend preparing each excuse. Of course the relation can't actually be quantified. You have 100 minutes to prepare your speech, but there isn't 100 of anything to divide up in this anticipation business. (Although you do work out that, if some particular outcome occurs, then your utility function is logarithmic in time spent preparing the excuse.)
Still... your mind keeps coming back to the idea that anticipation is limited, unlike excusability, but like time to prepare excuses. Maybe anticipation should be treated as a conserved resource, like money. Your first impulse is to try to get more anticipation, but you soon realize that, even if you get more anticiptaion, you won't have any more time to prepare your excuses. No, your only course is to allocate your limited supply of anticipation as best you can.
You're pretty sure you weren't taught anything like that in your statistics courses. They didn't tell you what to do when you felt so terribly uncertain. They didn't tell you what to do when there were no little numbers handed to you. Why, even if you tried to use numbers, you might end up using any sort of numbers at all—there's no hint what kind of math to use, if you should be using math! Maybe you'd end up using pairs of numbers, right and left numbers, which you'd call DS for Dexter-Sinister... or who knows what else? (Though you do have only 100 minutes to spend preparing excuses.)
If only there were an art of focusing your uncertainty—of squeezing as much anticipation as possible into whichever outcome will actually happen!
But what could we call an art like that? And what would the rules be like?
Part of the sequence Mysterious Answers to Mysterious Questions
Next post: "The Virtue of Narrowness"
Previous post: "Belief as Attire"
Edit - I didn't read the premises correctly. I missed the importance of the bit "Your mind keeps drifting to the explanations you use on television, of why each event plausibly fits your market theory. But it rapidly becomes clear that plausibility can't help you hereāall three events are plausible. Fittability to your pet market theory doesn't tell you how to divide your time. There's an uncrossable gap between your 100 minutes of time, which are conserved; versus your ability to explain how an outcome fits your theory, which is unlimited."
The time one spends preparing excuses is only loosely, and also inversley, linked to how easy to explain the event is. When unsure of an outcome to excuse what you are looking for is not the "most likely to be needed" excuse to be "really good" but for any excuse you need to be "as good as possible."
Even if your pet theory is so useless as to be utterly general, it should still be possible to estimate the easiest event to explain compared to any of the others, and that is where the least time should be spent. Failing that, if the events are all equally easy to explain with your pet theory then the time taken trying to work out where to spend the time would be better spent writing whichever explanation of up or down you think most likely of the two until it is as good as you can get it in less than half the time, then do the same for the other, then a few minutes at the end saying how these cancel if the market stays same or similar,
Better would be write a long list of excuses with predicted up and down values, and use them to get a range of levels of upnesses and downnesses that you can combine any number of to excuse any specific levels of up and downness. "Normally the reserve announcement would have had a huge upwards effect on the market, but because it was rainy today and baked beans are on sale in Wal Mart this is reflected in the only slight increase seen when looking at the market as a whole" This way you can even justify trends right up till the moment of truth "Earlier in the day the market was dropping due to the anticipated reseve announcement, but once it was discovered that Bolivia was experiencing solar flares, this slowed the downward trend, with the floating of shares in Greenpeace flinging the market back up again"
Lets use something more 'predictable' for illustrative purposes, you are a physics teacher in 1960/70's America, some serious looking people in suits turn up at your door, their pet scientist and all his notes were disappeared by the Reds and your country needs you.
After the time wasted arguing that it was insane to even ask you to do this you have both a gun to your head and 100 minutes left to come up with excuses as to why the "Hammer and Feather on the Moon" experiment went in any of the three ways*. Given that you have good reason to believe that the Hammer and Feather experiment may not go as you predict, spending 99.99 % of your time on the obvious answer is a very unwise use of your time resource. In fact it may be wiser to spend 1 minute on the obvious answer to have more time to try to excuse the feather hitting first.
*Turns out that the president had been told Russian telekinetics were going to mess with the results of the experiment to make Americans believe the moon landings had been faked, or, if you pefer, perhaps they were worried that the props department in Area 51 hadn't got the tensions on the invisible wires right, yet...