Where Einstein struggled in theory – relatively speaking

Which of the following observations did Albert Einstein make?

1. Compound interest is the eighth wonder of the world;
2. God does not play dice;
3.  The definition of insanity is doing the same thing over and over again and expecting a different result; or
4.  All of the above

As you make your decision, it seems an appropriate time to highlight how, here on The Value Perspective, we are currently working on a series of podcasts on the subject of decision-making at times of uncertainty – indeed, episodes with market strategist and author Michael Mauboussin and author and retired poker player Annie Duke have already been recorded.

With the exception of Mauboussin – one of our favourite value thinkers and, frankly, too good an opportunity to miss on this topic – our aim has been to interview guests who have nothing to do with finance in and of itself. The full line-up – who come from a diverse range of backgrounds yet are united by all having had to face uncertainty as part of their day-to-day jobs or projects – comprises:

•  Michael Mauboussin, market strategist and author
• Annie Duke, author and retired poker player
• Air Marshal Sir Graham Stacey, senior RAF officer
• Captain Marshal Elliott, former army officer
• Santiago Zapata, film producer
• Dr Nicola Wetherill and Sophie Montagne, ‘Ice Maiden’ Antarctic expedition members
• Sean Sutcliffe, CEO of Oxford Space Systems

In uncertain situations – when, as tends to be the case in investment and many other areas of life, you do not have all the necessary facts to hand – it can help to think ‘probabilistically’, that is to say, in terms of probabilities. And yet it turns out that, in one specific area of his expertise, Einstein struggled to accept that probabilities had any role to play. Which returns us to our multiple-choice question – what did you decide?

Despite what many corners of the internet may assure you, there is in fact very little evidence the great man held any strong views on compound interest or indeed ever sought to define insanity. On a number of occasions, however, he proffered the view that God does not play dice – apparently once provoking the exasperated response from fellow theoretical physicist Niels Bohr: “Stop telling God what to do.”

Each time Einstein used the phrase, it was while arguing against the theory of quantum mechanics, which deals with the behaviour of matter and light on the atomic and subatomic scale. For, even though his own work helped pave the way for this field of science, for many years Einstein was unable to come to terms with a theory where chance and probabilities played such an integral part.

As Walter Isaacson explains in Einstein: His Life and Universe: “Einstein resisted quantum mechanics because it abandoned strict causality and instead defined reality in terms of indeterminacy, uncertainty, and probability”. And he continues: “There is no real reason – other than either a metaphysical faith or a habit ingrained in the mind – to believe that nature must operate with absolute certainty.

“It is just as reasonable, though perhaps less satisfying, to believe that some things simply happen by chance. Certainly, there was mounting evidence that on the subatomic level this was the case. But for Einstein, this simply did not smell true. The ultimate goal of physics, he repeatedly said, was to discover the laws that strictly determine causes and effects.”

What Einstein found impossible to believe, writes Isaacson, was “the good Lord would have created beautiful and subtle rules that determined most of what happened in the universe, while leaving a few things completely to chance. It felt wrong. ‘If the Lord had wanted to do that, he would have done it thoroughly, and not kept to a pattern … He would have gone the whole hog. In that case, we wouldn’t have to look for laws at all.’

“This led to one of Einstein’s most famous quotes, written to Max Born, the friend and physicist who would spar with him over three decades on this topic. ‘Quantum mechanics is certainly imposing,’ Einstein said. ‘But an inner voice tells me that it is not yet the real thing. The theory says a lot, but it does not really bring us any closer to the secrets of the Old One. I, at any rate, am convinced that He does not play dice.’”

Here on The Value Perspective, we are by no means suggesting Einstein did not understand chance and probabilities – only that, if one of the greatest minds in the history of humanity struggled to accept they might play such a big role in one specific area of nature, it is hardly surprising that lesser mortals might have a hard time doing so, whether in the context of investment or their day-to-day life.

And yet, if we can bring ourselves to accept that chance and probabilities can be significant factors in our lives and that, despite our best efforts, some things are simply outside of our control, then learning to think in terms of probabilities really can help to improve our decision-making. These are the ideas – including the role luck can play in life and in investment – that underpin our podcast series.