The World is not the Same – After

In reality, there is no accurate way to calibrate a risk model right after a major loss event. That is because there is always a good chance that the world will change as a result of the experiences of the event.

In Japan, the rebuilding after the losses from the earthquake/tsunami will not replace what was there. The buyers of the products that were manufactured in Japan who were disrupted by the event have all found alternatives. And they have learned from the even to diversify their suppliers or at least deal with a supplier who has diversified exposure to risk. The Japan after the event will not be the same Japan as before.

A market or an industry, a company or a people rarely go back to doing things exactly the same way after a major crisis.

They may become much more conservative about the risk that caused the crisis.  They may just move on, like New Orleans which is now less than one third its pre-Katrina size.  They may adopt many new rules and regulations like Sarbanes-Oxley or Dodd-Frank.  Or they may finally start listening to their risk managers or even hire new CROs.

If you want to have a model that includes the year after a crisis, then you will need to study past crises and the reactions to those events.  What that may mean is that there are ripple effects of the crisis in the model. Not just another random year.  Because regardless of what the theories say, the world displays multi year effects.  Events are not over simply because the model turns to another time slot.



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2 Comments on “The World is not the Same – After”

  1. […] The World is not the Same – After […]

  2. Max Rudolph Says:

    The tsunami provided a good case study of second order supplier effects. Several manufacturers who needed rare earth metals diversified their direct suppliers only to discover (too late) that all of them used the same single source and it was now shut down.

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