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Value Creation Blog

What Is A Long Tail Event? - Wealth Management

Posted by Victoria Gehlmeyer

imagesIn Nicholas Talib’s book The Black Swan he talks about long tail economic events.  These are events like the real estate melt-down of 2008 that were only supposed to happen once every hundred years.

Talib points out that we’ve had several once in a hundred year economic events in the last twenty years.  He calls these black swans.  In his world black swans are rare, but not unknown. 

I call these events long-tail events.  They are on the tail of the bell curve.

The good thing about long-tail events is they are often discoverable.  We don’t like to recognize they can happen, but they aren’t very hard to predict.

In the 1980’s we had the savings and loan crisis.  We heard the rules of economic behavior had changed.  Commercial real estate values would never go down.  Not only did values go down, but our regulators completely missed or ignored criminal behavior on the part of some Savings and Loans executives.

In 1999 we had the unraveling of the tech bubble.  Again, an event that was easily predicted if one didn’t listen to the pundits who said “this time it’s different.”  We learned that economic reality doesn’t think things are different and the bubble burst leaving many wondering what happened.

The first half of the new millennium brought us the makings of our next long-tail event, the housing crisis.  I’m still in awe that people on Wall Street didn’t see this crisis.  The “this time it’s different” was about affordability of real estate and the belief that real estate would continue to grow in value by 10% per year.

We again saw economic reality take over - the bubble burst and the American pubic was held holding the bag for bad decisions made by our best and brightest.

Today we have the European Sovereign crisis.  The media tells us that it’s under control and we shouldn’t worry.  To me this looks like another black swan long-tail event building.  I believe economic reality will rule.  It’s only a matter of time before a new economic firestorm breaks out that we’ll be forced to pay for.

For me, the lesson in looking at long-tail events is being prepared.  If you believe a black swan event has a strong possibility of happening, taking steps to protect your assets is a good idea.

I think black swans live among us.  We need to be prepared.  What about you?  Do you think we have some black swans in the near future?  Please write me at Jpatrick@stage2planning.com or click here to set a time to talk with me.

Josh Patrick

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The ideas that are presented in this blog entry are those of Josh Patrick and are not the thoughts of NFP Securities or Stage 2 Planning Partners.

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Topics: wealth management

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