Tail risk, according to “Investopedia”:http://www.investopedia.com/terms/t/tailrisk.asp, is
bq. A form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution.
There’s another, more colloquial meaning to “tail risk,” which is simply the possibility of having a freakishly bad day. There’s a “book about this”:http://www.amazon.com/Black-Swan-Impact-Highly-Improbable/dp/1400063515.
Lately, we’ve been reminded that bad events deemed vanishingly unlikely actually might not be. So unlikely, that is. The nation’s supposedly uncorrelated residential real estate markets “all started plunging at once”:http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html. All those “credit default swaps”:http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080218/REG/794188688 suddenly came into play at the same time. Two satellites collided. Two SSBNs collided.
A continually iterated potential hazard with potentially unknown correlated features is, over time, less improbable than it might seem. “Stuff happens”:http://www.totalwonkerr.net/1858/stuff-happens.
Now, per the happenstances mentioned above, you might imagine that the “financial crisis/recession/clusterf#@k to the poor house”:http://www.thedailyshow.com/video/?searchterm=clusterf#@k+to+the+poor+house is the biggest deal on the Obama administration’s plate, the issue whose management will be most consequential, for good or ill. And in the short-to-medium term, that’s awfully hard to dispute.
But In The Long Term?
Look, I know some people are into comet strikes, and the climate situation looks worrisome. But where I come from, the Mother of All Tail Risks is nuclear war.
My nightmare can beat up your nightmare, see?
From the “stuff happens” perspective, the long-term issue of greatest consequence is taking U.S. and Russian nuclear weapons off alert and keeping them that way.
Yeah, I know, STRATCOM is very clear that U.S. nuclear weapons are not on “hair-trigger alert”:http://www.armscontrol.org/act/2007_12/NuclearAlert. This seems to mean that U.S. weapons would not be launched unless A) the President ordered it or B) _[correction] someone acting in his stead ordered it after_ nuclear weapons had already detonated on U.S. soil.
I have just five or six small concerns about this. Little things.
A) How sure can we be that the President of these United States will be of “sound judgment”:http://www.amazon.com/Presidential-Leadership-Illness-Decision-Making/dp/0521709245/ref=ed_oe_p when the time comes? “Really?”:http://news.bbc.co.uk/2/hi/americas/3754199.stm “You’re sure?”:http://www.doctorzebra.com/prez/g_roster.htm “Really, really sure?”:http://www.usnews.com/articles/opinion/2009/02/19/iraq-wmd-bush-and-the-mind-of-saddam-hussein-hide-and-seek-by-charles-duelfer.html
B) After a single weapon goes off that incinerates our national leadership — origin unknown — what happens, exactly?
C) Is the Russian arsenal on higher alert than the U.S. arsenal?
D) Is the Russian early-warning system adequate?
E) Assuming the Russian arsenal is at the same “day-to-day” alert as the U.S. arsenal, and its early-warning system is adequate, how sure can we be that the “President”:http://www.businessweek.com/magazine/content/02_27/b3790047.htm, Prime Minister, and other key officials of the Russian Federation will be of sound judgment when the time comes?
F) After a single weapon goes off that incinerates the Kremlin — origin unknown — what happens, exactly?
Global financial crisis, global schminancial crisis.
Seriously, if you think none of the things hinted at above could happen — because it hasn’t happened yet, right? — try talking to someone in the financial sector.
If You Only Read One Part, Try This Right Here
Now that U.S.-RF nuclear force reduction talks are “getting underway”:http://www.armscontrolwonk.com/2235/obama-medvedev-statement, I’m as pleased as anyone to see the numbers coming down, but I would vote with both hands and both feet to make the numbers _go up_ if that’s what it took to get the G-d-damned things off alert once and for all.