2012 Risk

If recent history is any guide, 2012 promises to be quite eventful.  We’re entering the new year with continuing financial turmoil across the Eurozone; the US Presidential race is starting in earnest on Tuesday January 3rd with the Iowa Republican Primary; North Korea’s new regime is promising nothing new, meaning that we can expect the same irrational and erratic behavior; we have Iranian sanctions and threats to close the Straight of Hormuz; and we seem to have a ‘new normal’ 9% unemployment in most of the developed world.  For the first time in memory, the most popular New Year’s resolution, as announced by Dick Clark’s Rockin’ New Year’s Eve, was not “lose weight” or “go to the gym more often.”  This year, or rather – last year – it was “Save Money.”  Better late than never, I suppose.

Arguing to myself that a blog about risk management should not itself engage in needlessly risky forecasting, I vetoed the very idea of presenting my predictions for risk in 2012.  So with reckless abandon that comes with New Year euphoria, here goes anyway…

Europe [yooruhp], n:  1. The repeated attempt to fit too many cultures and too many languages into a universally desirable land mass.  2.[yoorohpA] An icy moon of Jupiter which, once life is discovered there, will suffer the same fate.

More countries than what's good for it

When this many countries squeeze into this small an area, prevent war over long periods of time is no easy task.

I learned last year, while traveling in the UK [note to American readers – the UK, while according to some reckonings is part of Europe, doesn’t consider itself such and behaves accordingly], that the historical origins of the EU are not, in fact, economic.  Rather, the precursor to the EU was an agreement, in the 1950’s, by several of the continent’s countries to distribute the production of steel specifically to prevent any one country from having the means to build airplanes and tanks.  The EU is, in effect, an attempt to prevent war.  Fast forward to 2012 and we see two powerful countries that suffered dearly from WWII — France and Germany — doing almost anything they can to prevent the breakup of the EU.  They do this for good economic reasons – most of their trade comes from other EU countries – but they also do it because they know that a collapse of the EU could lead to armed conflict.  If the EU collapses outright (which I think is highly unlikely), or if some of the worst offenders are “invited to leave” then I can easily see the populations in those economically devastated countries rising up, rioting, or worse.  It’s happened before and we should all recognize that it can happen again.

Republican [ri-publi-kǝn], n.  Presidential hopeful claiming to posses: Lincoln’s Strategic Mind, Teddy’s Rough Rider Attitude, Regan’s Great Oratory, and Maggie’s Iron Grip, while actually holding little more than the Tea Party’s New Evangelical Born-Again Testament and the recently discovered Eleventh Commandment: Thou Shalt Not Tax [Shamelessly adapted from the Economist].

Republican Superman

Republican Superman, from the Economist, 31 Dec 2011

Oh boy has American politics changed in the past few years, and we’re now seeing just how polarized and nasty things can get.  Once upon a time in my youth, leaders of opposing parties “fought by day” and after the cameras turned away would invite each other to discuss how to resolve the issues over drinks.  Today that image is downright laughable.  The Potomac flows with vitriol.  2011 saw the first ever near self-inflicted default by the US.  While that notion seems out of the realm of possibility (everyone “knew” that the US wouldn’t let it happen), let’s remember that government defaults are neither rare nor the province of just third-world countries.  If you don’t agree, please read This Time is Different.  In the presidential race, we’ve witnessed the Republican party’s roster of nominees attempt to differentiate themselves from one another by taking more and more extreme positions on almost every issue at hand.  Each individual step can be understood in its immediate environment as a reasonable and calculated tactic to win the nomination, but taken together, they amount to a platform of dangerous extremes.  Whoever wins the nomination will find it hard not to continue down the road towards isolationism, nationalism, and extreme intolerance.  I think it’s time they all re-read F. A. Hayek’s The Road to Serfdom.

Mayan Calendar.  There is a lesson here, and for me, it’s quite frightening. The lack of scientific literacy as evidenced by the

Bizarro Explains the Prediction

number of people who are even a little bit concerned about “2012” is staggering.  My own conclusion about 2012 is that far too many people just don’t understand what’s possible and what’s not.  Let’s for a moment forget that we know anything about celestial mechanics or science and try to image what it’s like to try to decide whether or not to believe something.  On what will we base a reasonable examination of a claim, such as “the world will end in 2012”?  Safety in numbers works quite often, so we might look to others around us to see if they accept the claim.  We find that the results are mixed – it seems many people are indeed frightened, but many others say they’re not.  Next, we could look to authority figures – like authors or lecturers.  A cursory search through Amazon – just of the four characters 2-0-1-2 brought at least 60 books on the doomsday prediction to my computer screen (it actually didn’t tell me how many screenfulls of books it came back with and I stopped cycling through them after the 5th page).  Check — looks like there’s quite a bit written about this.  We could try a balanced approach and ask how many books there are debunking the 2012 predictions.  Searching “debunking 2012” came back with 1 book written in Italian.  Searching “2012 is wrong” gave a few more, but it also contained lots of books promoting the 2012 doomsday.  So, it seems that authority figures clearly side on the validity of the prediction.  Ask any scientist, however, and she’ll either tell you definitively that it’s all rubbish or she may look at you and just laugh.

One of the benefits of science is that it allows us to dismiss the absurd, like 2012, and therefore not waste any more time on it.  But 400 years ago, before the age of modern science, nobody had such a tool, and governments and people alike wasted time and effort pursuing ideas and activities that we now know to be worthless.  For many topics, we’ve educated ourselves out of the morass and now have real expertise.  Topics like medicine, agriculture, forensics, engineering, chemistry, manufacturing, and so on.  But for many other topics, like economics and market dynamics, we have yet to develop our body of knowledge past the descriptive stage.  We have no causal understanding.  Worse still, just about everybody claims to have some level of understanding of economics, regardless of their accuracy.  It’s as if everybody claimed to be a witchdoctor!  And that means that we are vulnerable to spending valuable time worrying about and working to prevent catastrophes that cannot possible every come about.  Economically, we are all vulnerable to a “2012” phenomenon because our knowledge is quite primitive, leaving us not knowing how to discern economic folly from fact.

So my only real prediction for 2012 is a rather safe one: on a macro scale, we will continue debating and second-guessing about each course of action as if we can’t tell if one course is better than another for a very simple and sad reason: we can’t.  On a micro scale, my firm and our partners will continue improving the state of quantifiable and actionable risk management.  And on this scale, it’s quite exciting because there’s just so much that can, should, and will be done!

Happy New Year.

One Response to 2012 Risk

  1. Bohdan says:

    It’s always been interesting to me how the economists play their game and pretend it’s just like other social sciences. It’s not. They make predictions, usually based on some reductionist model or some intuitive basis, and try to pass it off as scientifically derived. To a certain extent that can be an issue with other social sciences, as much as social reality is quite a bit more complex to study and make conclusions about than the physical reality.

    Anyway, happy New Year!

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