I have been preparing to teach my first MBA class ever at the Anderson School. Don Trump should enroll in my “Real Estate Finance” class. This class preparation has displaced some precious blogging time. But, I did manage to write this for the Christian Science Monitor. There is a mildly deep idea here. Social scientists are talking more about “fat tail” risk. Scenarios that we thought had a probability of zero of taking place may be more likely than this to actually occur and underlying trends such as climate change or financial liberalization may make such risks even more likely to take place. Such risk recognition should trigger new investments that protect us.
The ugly scenario is when we complacently believe that the probability of a bad event taking place is zero when in truth the probability is increasing. It is a cliche that a silver lining of disasters is that we update our risk assessments and may even over-respond to the new news. After the attacks of 9/11, I was afraid to fly. In terms of adaptation and self protection, such over-responses may be a good thing. The key is to recognize that in a “non-stationary” world that we “know that we do not know” the probability of ugly rare scenarios. Focusing on the climate change challenge — if we have this self recognition, then this stimulates a demand for solutions and new products, new land use and building codes and new ways of building our cities to protect ourselves. This logic bolsters my optimism in our ability to adapt to an anticipated but vague threat.