March 09, 2018

Ex post dangers are inversely correlated to ex ante perceptions of risk.

Sir, Stephen King writes: “One of the main “costs” of global economic success… is excessive risk taking. Put simply, the good times don’t tend to last because we start to do stupid things that bring them to an end. Until the equity market wobbles in early February, most investors appeared to be as complacent about potential risk as they had been ahead of the crisis.” “Global good times make the world act stupidly” March 9.

Is that really excessive risk taking, or is not more a belief that there is little risk?

It is surprising how much ex post dangers get to be confounded with ex ante perceptions of risk.

The most dramatic example of that are the bank regulators who, in Basel II, assigned a risk weight of 150% to the below BB- rated, that which everyone knows is risky, and only of 20% to the AAA rated, that which everyone can so dangerously believe is very safe?

That our banks have landed in the hands of such mentally feeble minds as those of the Basel Committee, is indeed a tragedy.

Per Kurowski