Depression, hyperinflation and excessive leverage are ranked as the top three risks that would have a high impact on global economic growth and asset returns if they occurred. Watson Wyatt has identified and ranked fifteen extreme risks in a new paper, entitled Extreme Risks, the firm ranks depression, hyperinflation and excessive leverage as its top three based on their impact and the risk together with the degree of uncertainty in assessing the risk. The bottom three are the end of fiat money, a major global conflict and a killer pandemic.
Watson Wyatt recommends that a robust defence against extreme risks can be built by combining a qualitative understanding, quantitative modelling and a cost-benefit analysis of possible strategies. Peter Ryan-Kane said; “By accounting for these risks in advance, rescue plans can be formulated so that they are ready to implement as soon as necessary to prevent value destruction. However, this approach does not come naturally as it goes against the status quo of reacting to events as they occur.”
Watson Wyatt concludes that of all of the things to be considered, public policy issues should be a priority as they will both influence the risks and be shaped by the shifting likelihood of the different risks through time.
Ranking of extreme risks
Paul Arkwright
Publisher
