Wednesday, February 25, 2009

The Fat Tail

Last night I attended the book launch party for the
The Fat Tail, a new book co-authored by Ian Bremmer and Preston Keat. Bremmer is President and Keat is Director of Research at The Eurasia Group, a political risk research firm. Admittedly, I have known Bremmer for almost 10 years and my opinion may be biased, but I consider him to be the foremost expert on political risk. I have heard him deliver a number of speeches over the years. He is an excellent speaker who makes extremely cogent arguments.

The title of the book comes from the bell curve. In a normal distribution, there is a 67% probability that an outcome will fall within one standard deviation of the mean. Unlikely outcomes occur at the tails. In a distribution with fat tails, the probability of unlikely outcomes is higher. Bremmer and Keat are implying that investors often underestimate the probability that unlikely outcomes will occur. For example, they begin the book with the 1998 crisis in Russia and tell us how the leading experts assured investors that Russia would not default on its debt. Yet that's exactly what happened. The book is full of such examples.

Because I have just begun to read the book, I can't provide a complete analysis. So far, however, I find it interesting and timely. It also fits nicely with Bremmer's recent assertion that financial regulation and the U.S. Congress represent the greatest political risks of 2009.