Extreme Outcomes: Why We Underestimate Acute Risks

It's best to accept that at some point you will lose money and avoid betting too heavily on any one outcome, says Morningstar's Samuel Lee

Samuel Lee, ETF Analyst 15 May, 2013 | 1:25PM
Facebook Twitter LinkedIn

It's a law of nature that bad things happen more often than not. The possible outcomes that humans consider desirable are a sliver of all possible outcomes. It's why genetic mutations usually hurt or kill offspring born with them, why throwing a wrench into a finely turned engine will almost never make it run better, and why stock prices are more prone to sudden collapses than sudden rises.

Consider human history. For all but a fragment of it, about half of all children died before their fifth birthdays. Of the ones who survived, life was nasty, brutish, and short. According to data compiled by economist Angus Maddison, the total world population grew at an annualised rate indistinguishable from zero over the period from 1 AD to 1820 AD. Per capita output grew even slower, if at all. While the data is necessarily sparse and uncertain, the estimates are reasonable. A growth rate of, say, 0.5% annualised over 1,820 years implies growth by a factor of more than 8,750, an implausibly high number. Ergo, past growth rates were likely lower.

Over the millennia, there were pockets of progress, some lasting for centuries. The ones we know of included the Roman Empire in Europe, the Tang and Song dynasties in China, and the Inca, Aztec and Maya civilizations in the Americas. However, these civilisations, for the most part, did not set growth on a permanently higher trajectory. They usually ended in the sacking of great cities and the burning of books. Humanity didn't convincingly break out of this cycle until a couple of centuries ago. Against the yardstick of written history, this era of growth has been short--only a handful of lifetimes.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Samuel Lee, ETF Analyst  -

© Copyright 2021 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies       Modern Slavery Statement