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finance, Accountancy & Finance

Understanding the Black Swan Effect (Part 2)

As promised, here’s the concluding half of my two-part post on contemporary black swan events and their potential effects:

US Disengagement from Global Affairs

The American Presidential election is a Hobson’s choice between the lesser of two less-than-ideal candidates who have managed to gain nominations for the race. Whichever nominee wins, their win will result in a very unstable [from a financial point and leadership point of view] occupant in the White House.

It may have seemed like an outright impossibility…it did to me…but Donald Trump’s chances of becoming the next US president are worryingly high.  He’s made it abundantly clear that his primary intention is to isolate the United States from some of the world’s most turbulent regions, at least in terms of international affairs and foreign policy. The US could become a closed state to much of the world – the financial and business implications of which being almost impossible to predict.

Mass Immigration 

Mass immigration [by refugees] will also put a huge strain on finances across Europe and is fuelling the far right, particularly in Germany and other European countries. There is currently no answer to the crisis and no apparent consistent strategy to deal with the issue.

No matter how the immigration crisis in Europe is handled going forwards, the repercussions will be severe. As it stands, an almost total lack of action is breeding instability and financial problems for many nations. Should policy be introduced, how it will be implemented and policed remains a difficult question to answer.

Natural Disasters

We have a growing number of extreme weather events around the world. Not only are they causing extensive damage from a financial perspective, but also creating huge human tragedies. I now believe these will increase both in frequency and intensity, reaching more developed regions of the world.

Natural disasters are of course the most unpredictable of all black swan events. Awareness and preparation can certainly help minimise their destructive effects, but avoiding or preventing them entirely is simply out of the question.

Weathering the Storm 

The way I see it, comprehensive risk management strategies represent the only workable approach for effectively dealing with black swan events. Risk management must be both formal and structured, rather than vague in its consideration of scenarios of such magnitude.

Effective protective measures will always vary massively from one business and industry to the next, in accordance with the nature and specifics of the event. To identify all possible risks and plan for them in advance represents the cornerstone of long-term stability and prosperity.

As for Nassim Nicholas Taleb, he believes the key to building and living in a black swan-resistant world lies in ten key principles, which he laid out as follows:

  1. What is fragile should break early while it is still small. Nothing should ever become Too Big to Fail.
  2. No socialisation of losses and privatisation of gains.
  3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
  4. Do not let someone making an "incentive" bonus manage a nuclear plant – or your financial risks.
  5. Counter-balance complexity with simplicity.
  6. Do not give children sticks of dynamite, even if they come with a warning.
  7. Only Ponzi schemes should depend on confidence. Governments should never need to "restore confidence".
  8. Do not give an addict more drugs if he has withdrawal pains.
  9. Citizens should not depend on financial assets or fallible "expert" advice for their retirement.
  10. Make an omelette with the broken eggs.

Wise words, well spoken.