Published On: Fri, Jan 27th, 2017

Risk and uncertainty

Jacob Gelt DekkerOn 25 January 2017, between 9: 30 and 10: 00 o’clock, the Dow Jones Index crashed through the 20,000-ceiling by jumping from 19,994.48 to 20,000 ++.  On 6 March 2009, the DJI had hit a recession low of 6,626.94, that, according to some experts, would be beyond any future rescue. So, a recovery of the stock market with nearly 14,000 points in seven years, is most remarkable and far beyond the doomsday scenario of many apocalyptic preachers.

But even today, messages in the social media are fighting for attention with horror collapse predictions. The Emotion Finance Preachers continue to sell fear, and some even come with precise numbers.

“The DOW is going to crash to a degree we haven’t seen since the Great Depression,” says self-proclaimed, world-renowned economist Harry Dent, supposedly a famed Harvard Economist whatever that may mean.

“We’ll see a historic drop to 6,000,” he continues, “… and when the dust settles – it’ll plummet to 3,300. Along the way, we’ll see another real estate collapse. Gold will sink to $750 an ounce, and unemployment will skyrocket. It’s going to get ugly.”

Down the ages, quack doctors selling snake oil for patent medicines, stargazers, and fire-and-brimstone preachers have been in high demand; people seek certainty.

Today, sophisticated as we are, we have economists selling forecasts, reflecting the desire for certainty that is as irrational as it is understandable.

“ In this world, nothing can be said to be certain, except death and taxes,” wrote Benjamin Franklin in 1789. In life, we have risk and uncertainty. We will have to cope with uncertainties, risks can be insured.

The probabilities of the risks of a house fire, a car accident or premature death can be calculated quite accurately from large statistical databases.  For instance, statistics will show that the most common age of death for women in Western Europe, may be, 85 years.  Of course, the distribution looks like a bell shape curve; most women will not die at 85 but different ages.  This personal risk can be insured.  The differences, for earlier death with a lump sum and an annuity for later death.

Insurance companies spread personal risks by bundling it, thus they cover the damages of calamities, and in the meantime make a nice profit from people’s wish to hedge personal risk. An insurance company’s success depends on the accuracy of their statistical base and forecasts. Insurance companies fare well by carefully calculated probabilities.

“Uncertainty, by contrast to risk, concerns events where it is not possible to define, or even imagine, all possible future outcomes, and to which probabilities cannot, therefore, be assigned ” (King, former Governor Bank of England).  Those who were trying to forecast the life cycle of the landline telephone systems in the 1980’s, had no idea about the invention of future smartphones that have taken over the markets worldwide. This invention was an uncertainty that nobody could include in their calculations.

So uncertainty, radical uncertainty, is the spice of life. Dow Jones gazers, you live in a market of total uncertainty. Hedge what you can, and for the rest, enjoy the ride.

By Jacob Gelt Dekker
Opinion columnist for Curaçao Chronicle

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