As we move through the first quarter of 2010, most personal investment portfolios are still suffering a nagging hangover from the economic crisis of 2008-09. As companies re-define risk management, so must each of us – in terms that address the vagaries of a globalized, internet-facilitated world economy we no longer can control.
One of the new terms borne of the recession is Black Swan events – low probability, high-impact events that are almost impossible to forecast. Black Swans don’t have precedents; so how do we protect our investments from them?
Simply, risk management today is all about reducing the impact of what we don’t understand. We need to spend less energy figuring the odds that events will occur, and focus more on making sure we can handle the consequences if they do.
In short, rather than placing a greater emphasis on earning profits than on avoiding losses, we need a more balanced mindset. And according to Nassim N. Taleb, the Distinguished Professor of Risk Engineering at New York University’s Polytechnic Institute, and Daniel G. Goldstein, assistant professor of marketing at London Business School, and Mark W. Spitznagel, principal of Universa Investments, we must remember that the biggest risk lies within us; we overestimate our abilities and underestimate what can go wrong.
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John Karas
President & CEO
johnkaras@riverviewbank.com
(360) 693-7442
Source: Harvard Business Review
October 2009