Professor Preston Keat of the Columbia School of International and Public Affairs presented the aim of his recently published book, The Fat Tail: The Power of Political Knowledge for Strategic Investing, as “the beginnings of a toolkit to think about political risk.” In an increasingly interdependent world that is weathering an economic downturn, this may be an offer we can’t refuse.
Keat co-wrote the book with Ian Bremmer, president of the leading political risk consulting firm, Eurasia Group. He is the director of research, a member of the management committee, the head of the Europe and Eurasia practice group, and an analyst for Poland and Hungary at Eurasia Group. Together, the authors endow today’s volatile world with a clear illustration of “how political risks can be identified, analyzed, and mitigated—just like any other risk.” As Keat explained in an interview, “Political risk is very complex and often so tricky to think about that people decide not to deal with it.” He nonetheless maintained that “political risk is manageable.”
Released by Oxford University Press last month, The Fat Tail addresses dynamic and complex political issues that are too often stuck in the “error term” of economic and credit risk models. Why is this such a pressing concern? Because, as the authors contend, “the dramatic increases in global economic integration, trade, and capital mobility in recent decades, combined with growing political instability and government intervention in markets, have created a climate in which political risk is more relevant than ever for companies and governments.”
“Prior to a year ago, political risk was seen as an issue in emerging markets that have an opaque political system,” Keat said. The global financial crisis has changed this trend, however. “Developed industrialized democracies feel more like emerging economies as their governments become more active in trying to stabilize economies and instill regulations,” Keat explained.
The book’s title signals a challenge to the misleading assumption that risks follow a normal distribution. “Fat tails” are defined in the book as “the unexpectedly thick ‘tails’—or bulges—that we find on the tail ends of distribution curves that measure risks and their impact. They represent the risk that a particular event will occur that appears so catastrophically damaging, unlikely to happen, and difficult to predict, that many of us choose to simply ignore it. Until it happens.”
As the authors dissect political terms, describe the impact of political actors on capital markets, and interlace explanations with historical references, their style presents the complex as something manageable.
The Fat Tail begins with a chapter on understanding and managing uncertainty, or today’s “unknowns.” It then presents different types of political risks— geopolitical risks, expropriation, regulatory changes, domestic instability, and terrorism. As explained in the introduction, the authors “detail how each risk is identified, weighed, and mitigated and explain how companies and governments did and didn’t assess the risks effectively.”
The final sections of the book focus on effectively communicating the risks once they have been identified and assessed. Whereas the private sector has been leaving risk assessment to professionals with business or mathematics backgrounds, The Fat Tail presents the political scientist’s perspective on political risk and uses social science methods to develop a solutions package.
In addition to working at Eurasia Group, Keat and Bremmer teach a seminar on political risk at SIPA. “It’s a very solid mix of students,” Keat said. The course is grounded in political theory, but the professors use their professional experience to prepare students for a career in political risk analysis or policy work. “We push students to do forward-looking analysis,” Keat explained.
Preston Keat will present The Fat Tail: The Power of Political Knowledge for Strategic Investing and do a book signing on April 28 from 6 to 8 p.m. in room 1512 of the International Affairs Building. “The goal is to develop new, flexible approaches to new challenges,” he said about the book.
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