On Dinosaurs and Dividends

Mass Extinction
Sixty-six million years ago an asteroid blew its way through the Earth’s atmosphere and detonated in what we now know as the Yucatan Peninsula in the Gulf of Mexico. The result was a mass extinction event which wiped out about 75% of the world’s species including all of the flightless dinosaurs. As Black Swans go, it was a biggie.

Right now investors are experiencing their own version of the K-Pg event, with whole countries going into lockdown as homo sapiens once more shows its surprising capacity to act collectively when faced with real and present danger. As a side effect investors are discovering that dividends are rapidly becoming an endangered species; but there again – does it matter?

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Totally Addicted To Debt

Squeezed Addicts

Predictably the recent set of rating agency downgrades caused squeals of anguish from top tier banks, expressing outrage that their efforts to make themselves less risky aren’t being treated with the respect they think they deserve.  Or perhaps their executives are simply angry that their bonus-justifying profits are being squeezed?

Their real problem, though, is that the world has changed.  Their debt fuelled addiction to old-style business models is under threat of extinction.  Those last century profit margins are gone for a generation or more: it’s time to go cold turkey, whether they want to or not.

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When Muddled Modellers Model Muddles

Hat, In, Cat, The

If a muddled modeller models a muddle do they end up with a muddle model or a model muddle?

Sadly Dr. Seuss’s most famous creation isn’t about to appear and rescue us from this conundrum. The problem is known as model risk and it’s what we often end up with when we start trying to model financial systems: a muddle rather than a model. Which helps explain how people who don't exist can get mortgages they can't pay.

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Risk, Reality and Richard Feynman

Rocks and Risk

One of the problems that lies behind many of the crises that have afflicted the financial sector over the past thirty years or so is that business managers seem to have difficulty relating the level of risks that they’re taking to something akin to reality. For various reasons, not entirely unrelated to the need to make business cases look reasonable, the potential risks in many transactions are downplayed to the point where they simply vanish.

This isn’t, however, a problem exclusive to the financial sector. Many other organisations face these problems as their managers are squeezed between rocks and hard places. As NASA, and its astronauts, have found to their cost.

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