As human beings, we have the tendency to struggle with the nuances, and often unexpected randomness, of future outcomes.
And the predictions of “experts” are notoriously unreliable, with the only question often being: “Wrong by how much?”
Of course, as underwriters and managers of complex credit, economic and financial risks, it is natural for the Awbury Team to place more emphasis on the downside element of risk/reward calculations.
Nevertheless, the world has not (so far) come to an end; and, over time, positive outcomes tend to outweigh the negative- otherwise we human beings simply would not be here- what one might call Humanity’s Positive Skew!
Yet, we still have to deal mentally with the fact that we seem predisposed to pay more attention to negative or bad news/information than the opposite.
In one sense, this is a rational survival mechanism; but most of us now live in a world in which we do not have to wonder whether a rustle in the undergrowth means that we are prey for some more efficient and lethal carnivore.
Naturally, the recent pandemic demonstrated that complacency, or the view that extreme events cannot happen, is dangerous. However, that has to be tempered with the fact that, in the face of the challenges posed, many societies and most businesses coped remarkably well.
So, at a time when not much seems to be going right in geopolitical terms, and economic outlooks in many parts of the world are uncertain at best, we should bear in mind that the “fat tails” of risk distribution can exist at both ends of the curve, even if we are pre-disposed to worry (quite rationally) about the left-hand tail of that distribution..
These thoughts were prompted by a Bloomberg article we read, authored by John Mickelthwait and Adrian Wooldridge, entitled “The 10% World Offers a Sliver of Hope for 2024”. In this (as a counterpoint to a previous article from 2016 (The 20% World), in which they posited a number of downside risks assessed as a 20% probability) they posit that one may well be surprised that a number of seemingly lower probability outcomes may actually transpire, or negative outcomes be avoided. In other words, one should not be surprised if outcomes do not conform with “received wisdom”- something an underwriter always has to bear in mind.
The determined pessimist (or self-professed “realist”) is likely to dismiss the likelihood of any positive outcomes in the Ukraine/Russia conflict; in the Middle East in the wake of the October 7 terrorist attacks; or in the consequences of the Chinese Communist Party’s dogma requiring the “absorption” of Taiwan into One China. Taken individually, one could argue that such a view is entirely rational; yet across the spectrum, an unexpected outcome is far from impossible. If outcomes were only ever bad, and apparent trends irreversible, we would not still be here; and not enjoy the benefits we do today.
With all that unaccustomed optimism expressed, we shall now re-apply our “tin hats”; and resume our usual, deeply skeptical approach to the idea that there are any upsides in this world!
The Awbury Team
Awbury Insights 