Never think that lack of variability is stability. Here, Nassim Nicholas Taleb flags a cognitive bias that affects how many of us perceive risks.
"Never think that lack of variability is stability." Here, Nassim Nicholas Taleb flags a cognitive bias that affects how many of us perceive risks.
The prevalence of recent memories and positive thinking often makes us underestimate how unpredictable human and natural phenomena are. But every now and then, a dose of reality reminds us that stability is not as common as we thought. In the second half of 2017, a series of high-severity natural phenomena, notably affecting the US, put an end to a prolonged cycle of mild catastrophes. As I am writing this, stock markets are undergoing severe volatility spikes and the upwards trend in developed markets' interest rates is accelerating. The abruptness of these changes suggests many had overestimated the level of underlying stability.
Actuaries and other professionals develop models that aim to explain the potential damage of catastrophes and the moves in financial markets, among others. Those models, along with professional experience, are the basis for risk pricing, investment and management decisions. In the current issue, The Actuary tries to shed some light on those topics: David Braun shares his experience and career progression from life insurance to investment management, and provides a long-term investment perspective on fixed income markets. Arno Kitts presents a simple, yet powerful view of the link (or sometimes lack of) between fundamental valuations and equity prices. And several insurance professionals discuss the impact of natural catastrophes, epidemics and the implications on modelling, pricing and beyond. Although we know that instability will continue to manifest itself in the future, this insight may make all of us better equipped to understand it.
Enjoy the read!
Francisco Sebastian
Editor