We live in a universe of uncertainty, that is described by the inequality set out in physicist Werner Heisenberg’s uncertainty principle (see https://en.wikipedia.org/wiki/Uncertainty_principle).
How do we account for probabilities when faced with uncertainty, and do financial statements clearly present the scope of future probabilities and present uncertainties in a business? While there are no perfect solutions the question is one that Warren Buffett, Berkshire Hathaway’s CEO and legendary investor, faced in his 2015 letter to shareholders in response to a proxy proposal asking for a report on the effects of climate change on the company’s insurance business.
“It seems highly likely to me that climate change poses a major problem for the planet. I say “highly likely” rather than “certain” because I have no scientific aptitude and remember well the dire predictions of most “experts” about Y2K. It would be foolish, however, for me or anyone to demand 100% proof of huge forthcoming damage to the world if that outcome seemed at all possible and if prompt action had even a small chance of thwarting the danger. This issue bears a similarity to Pascal’s Wager on the Existence of God. Pascal, it may be recalled, argued that if there were only a tiny probability that God truly existed, it made sense to behave as if He did because the rewards could be infinite whereas the lack of belief risked eternal misery. Likewise, if there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy. Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear.”
Buffett did not offer an opinion on how the cost of building the ark should be presented in financial statements, but it seems to be a question worth considering.