The Stock Market Today Can’t Predict Tomorrow: New Insurance Policy Aims To Protect Against Black Swans

The Stock Market Today Can’t Predict Tomorrow: New Insurance Policy Aims To Protect Against Black Swans

When financiers talk about a Black Swan, they aren’t referring to Odile. Instead, they are using the moniker for an extreme, unforeseen change in the stock market, as named by author and financial expert Nassim Nicholas Taleb. Taleb, in his 2007 book ‘The Black Swan,’ named the event after the fact that historically, people believed only in the existence of white swans—until black swans were discovered in Australia.

Potential Black Swans Have Been Neglected

According to Bloomberg, Taleb spent many years asserting that bankers were becoming blind to black swans (also known as tail-end risks, named for the outliers in a the oft-used bell curve) and looking back instead of forward, obscuring their view of future market changes. He was vindicated—but surely displeased—when Lehman Brothers failed in 2008 and the recession hit.

The Only Clear View Is Forward

In history class, we learned that studying the past keeps us from repeating the same mistakes in the future. But when it comes to the stock market, our lesson was off the mark. Past economic patterns can be (and are) analyzed endlessly and used to create probability models for the future. The problem with these models is that they don’t include a crystal ball. We can analyze and anguish and predict what will happen tomorrow, but we won’t know until tomorrow arrives. And when it does, we can only hope that the pond will be free of black swans.

Companies Offer Insurance For 15% Decreases In The Market

Because we cannot ensure tomorrow will be reassuringly avian-free, companies are looking into providing insurance against the possibility. Pimco, an account managing firm that manages Citigroup Inc. and Deutsche Bank AG, as well as the world’s biggest bond fund, is one of the more high-profile companies offering this insurance. The plan will offer to protect its investors against market drops of 15% or more.

Tail-End Risk Insurance Is Appealing…But Effective?

Pimco intends to profit from the remaining financial paranoia that investors experienced throughout the recession. It doesn’t take a financial analyst to realize that the close tie between money and emotions means that the proffered insurance will appeal to clients. From that, another currently unanswerable question arises: Will tail-end risk insurance be successful beyond marketing—will it soften a black swan? As we’ve learned, only tomorrow can tell us.


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