TAIL RISK MANAGEMENT

An in-depth series of strategies focuses on managing long-term survival in the business world.

Vander Straeten’s dense, information-packed nonfiction debut concentrates so tightly on tail-risk management in the modern, interconnected global world that it begins discussing tail events even before it properly defines them. (This is one of many indications that the book will be far more useful to business and management professionals than to beginners in the field.) A tail event, as the author sees it, is an occurrence that “from the perspective of the regularity of historical events or perhaps only from perception, should happen only once in a thousand, million, or billion years.” The key allowance there is of course “perception”—in reality, tail events are common enough on a small scale for experts to generalize about them and produce books like this one, designed to predict and alleviate their effects. “Tail-risk management,” vander Straeten writes, “has mostly been the focus of important theoretical literature that aims at explaining how real aggregate tail risks can arise from a variety of shock configurations at disaggregated levels of an economy and how one can model and hedge against them.” His guide aims—and admirably succeeds—at taking such discussions out of the realm of theoretical literature and putting them before readers in concise and concrete terms. The book includes an extensive bibliography and well-produced graphics designed to lighten its informational load, although the reading experience here is nevertheless pleasingly steep. The author, paraphrasing former U.S. Defense Secretary Donald Rumsfeld, has thought deeply about the “unknown unknowns” that threaten the long-term survival of a business just as surely as they imperil society or the world itself. Vander Straeten breaks his work into roughly even segments dealing with tail-event assessment, management, and response, but the most compelling section covers the messages of these highly unlikely “black swan” episodes. “The idea is not to prevent tail risks from occurring,” readers are told, “but rather to build a resiliency in the business model to face and mitigate the effects of a black swan event.” Naturally, a good deal of the volume’s focus is on financial speculation, where the immediate personal effects of such unexpected incidents can be quantified. The central core of vander Straeten’s manual centers on capital and hedge fund management, outlining approaches to riding out market fluctuations and such. Here, as elsewhere, the author can get quite technical (“It is widely accepted within the financial markets community,” he writes in a typically galloping passage, “that there is a need to accept investment risk in order to generate the target returns set out in their investment portfolio strategies”). But the book’s clear common sense and advocacy of bold thinking in the face of uncertainty compensate for a perhaps unavoidable level of wonkishness.

A compact and detailed plan for understanding—and mitigating—largely unpredictable episodes in the markets.