Wednesday, April 15, 2009

Risk Management

In the financial world, risk management is a major component that a financial institution uses in determining how it operates its business. Unfortunately, the recent financial meltdown has demonstrated that there were major failures in firms correctly determining and mitigating risk. The link below is to a video that provides an excellent risk analysis on whether we should take action or not to fight global warming, aka global climate destabilization. There is a debate on whether we should fight global warming with carbon caps, carbon taxes and other emission restrictions because such government intervention will slow down our economic growth. Alternatively, if we do nothing and those cataclysmic events forecasted by leading scientists do occur, we will have bigger problems than a stagnant economy. We will have:

1) Economic losses that could equate up to 20% of the world GDP;

2) mass migration of people;

3) destruction of thousands of species;

4) flooding of major cities such as New York, Hong Kong, Shanghai and Tokyo;

5) destabilization of governments;

6) increased conflict of countries fighting over water rights and other resources;

7) mass starvation;

8) droughts; and

9) the end of humanity.

Perhaps, not all of these events will occur; however, if at least a quarter of them occur, I would say that I would be willing to accept a slow down in econonic growth over the end of the world as we know it.

By acting now, we will be able to mitigate the above events and hopefully prevent them from occuring at all. In addition, such action will be an investment for a better future for our children and generations to follow. Of course, this will require us to change our habits. Consider it similar to any other bad habits that we have to change to avoid a negative result, such as eating fried food or smoking. Of course, there is a level of adjustment and some growing pains; however, in the end we do it because we know it is good for us and, ultimately, it becomes second nature. Like eating heathier and quiting smoking, we need to break those bad habits to have a future. This will be a painful process for all of us on an economic and personal level; however, we are resourceful people. We have survived two world wars, a depression, epidemics and reality TV shows. We will survive here too. Alternatively, if we do not do anything, we will not survive. Of course, I may be completely wrong here; however the empirical data and the first hand evidence that I see on a daily basis tells me otherwise. In the end, not acting an hoping that I am wrong here is not a risk I am willing to take.

You decide. To help you in your decision making, watch the video and then make your own table with two columns. On one column make a list of the events that would occur if we would take action to fight global climate destabilization and in the other column put down the worse case scenario of events that would occur if we did not act. Then you decide which side you want to be on. Here is the link to the video.

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