A year after the implosion of Lehman Brothers sent world markets into turmoil, the question of where the next global shock will come from — and whether it can be predicted and prepared for — has never been so urgent.
What makes the issue particularly difficult is that many of the events catastrophic enough to cause a major crisis — known as "fat tail risks" or as "Black Swans" by trader and author Nassim Nicholas Taleb — come from outside the realm of finance. To be able to forecast what the next global shock will be, we need to be able to make predictions about geopolitics, war, terrorism, extreme weather events, earthquakes and pandemics.
In their book this year on fat tail risks, Ian Bremmer and Preston Keat of political risk consultancy Eurasia Group noted that they pose fundamental problems for accurate prediction. Fat tails, they wrote, "represent the risk that a particular event will occur that appears so catastrophically damaging, unlikely to happen, and difficult to predict, that many of us choose simply to ignore it. Until it happens."
A growing body of theory and evidence suggests that making accurate forecasts about rare catastrophic events is inherently impossible. But it also suggests a practical solution to mitigate the dangers — detailed scenario-planning by imaginative analysts who do not cling too tightly to mathematical models of reality.