Remember 2017? It feels like decades ago.
There was a time in 2017 when we were wondering whether Donald Trump and Kim Jong-un of North Korea might go nuclear.
We may be dealing with a pandemic, but I guess one consolation is that we’re not dealing with COVID-19 while also dealing with the fallout of nuclear aggression.
During that heady time, Alex Tabarrok wrote an interesting article on the Marginal Revolution blog he co-authors with Tyler Cowen. The article was titled “Can you short the apocalypse?”.
If the probability of nuclear war goes up, why doesn’t the stock market go down?
Tabarrok asked the very reasonable question: “If the probability of nuclear war just went up, why isn’t the stock market down?”
He also observed that the stock market didn’t fall during the Cuban Missile Crisis, either.
Tabarrok argues that stock markets don’t seem to factor existential risk into valuations. If the apocalypse happens, markets will become irrelevant. It doesn’t matter whether you bought this or that share. It will all be dust in the wind – figuratively, if not literally.
If the apocalypse really is coming your best bet is to cash out and spend it all now. But really how much fun would that be? Sure, you could have a great week of hookers and coke but I suspect a lot of people might prefer the cheaper option of a walk in the forest.
In short, there’s an implicit bias in the economy and financial system towards operating with the assumption that the economy and financial system will continue in fundamentally the same fashion. Otherwise, we’re probably dealing with a situation that won’t see anything resembling law and order (including the enforcement of property rights), and the social norms we take for granted.
To paraphrase the Gospel according to Matthew: the preppers shall inherit the earth, and shall delight themselves in the abundance of war.
I’m all about managing risks. I’m fascinated with prepping (Neil Strauss’s book Emergency is an entertaining read, for example, and I’ve written before about Amanda Ripley’s fascinating book The Unthinkable), but my interest is mainly intellectual. But if you’re that way inclined, you do you!
But as the stock market goes, so go I.
One way of managing risk is to accept risk
There are four main ways of managing risks. You can avoid risks. You can reduce their likelihood and/or mitigate the potential impact of something occurring. You can transfer risks (ie, pool risk with others, such as through insurance). You can also accept risks.
There is a line where you have to consider whether you should just accept a risk, and acknowledge that if it happens, it happens.
At the personal level, I’m that way when it comes to events that are apocalyptic or are existential in either the narrow or broad definition of the term. I may be fascinated with prepping, but I don’t have the time and inclination to go as far as necessary to be a proper prepper. The opportunity costs to living my best life within the usual constraints of society are enough.
(At the societal level, I think we should pay much more attention to existential risks, and aim to minimise their likelihood as much as possible — to the extent that we can avoid them if at all possible. But that’s a bigger conversation for another day. Toby Ord’s recent book The Precipice is a masterpiece on this topic.)
You can’t short the apocalypse – so you might as well be optimistic
My main point is that you can’t short the apocalypse. There comes a point where you need to accept some risks, and know that there’s not much you can do to manage them in any other way.
All of my plans are predicated on some sort of continuation of living in a democratic, market-based economy, with strong rule of law that recognises and enforces property rights (among other things!). I assume that this will stay the case in New Zealand, along with other economically productive countries with whom we trade.
I think this is a reasonable assumption to have: if we don’t have these things, who knows what the world will look like, and what skills and resources will help us. All I can say is that they’ll be different from what’s adaptive in the current environment.
Time will tell whether my assumption is realistic. But if I’m able to maintain that assumption, and if I’m prepared to assume that we won’t face any existence-threatening events, then I have every reason to be optimistic about the future.
Yes, there are significant challenges ahead (such as climate change, and whatever crazy dynamics that have resulted in Donald Trump having access to the nuclear codes). But we are also on the precipice of some amazing technologies and scientific innovations in the coming years and decades.
Having optimism for the long-term future makes it easier to plan for the long-term future. In fact, even in times of adversity, like we’re experiencing right now, it makes me pretty excited about what the future holds.