Corona is NOT the end of the World: a solution!

A lesson in risk management.

We have posted several stock market observations in relation to this year’s crisis and most recently suggested how to deal with it investment wise (hanseatichunter.com/post/the-cub-and-the-hunt). Now, I became aware through the CFA Institute of an excellent article written by two of the most experienced and respected investors/researchers, Larry Siegel and Steve Sexauer (link below). It contains two gems that I want to highlight:

(1) Utilitarian-calculus: I believe most people have a negative reaction when mathematics is used to solve moral issues. That is why Siegel/Sexauer make the concept so tangible, by asking two questions: A) Would you be willing to reduce the world’s economic output to exactly zero — meaning nobody eats, starting right now — to save one life? And B) Would you pay one dollar to save that life?

The optimum lies between these poles and is solved by utilitarian calculus: “ [It] holds that any action should maximize the summed utility of all the people in the world, taking into account positive and negative aspects of utility — death is very negative but it is possible to imagine a fate worse than death — and including the effects that you can see and those you cannot.”

(2) The COVID-19 Iceberg: A picture says a thousand words, so this blog stays short.

Source: Dan Mitchell

Policymakers focus almost exclusively on what can be seen. This picture marks it as “Coronavirus Deaths”. I would add that the focus is on infection numbers, with the intention of getting a useful lead indicator. The real shocker is of course the neglect of all the issues below the waterline.

In conclusion, by using less emotional methods in dealing with societal crises, we will be able to find better solutions and no doubt prosper in the future.

The HanseaticHunter

#riskmanagement #coronavirus #utilitariancalculus #enlightenment #cfainstitute

blogs.cfainstitute.org/investor/2020/08/20/living-with-risk-the-covid-19-iceberg