"[T]here are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don't know we don't know."
— Former United States Secretary of Defense Donald Rumsfeld
The recent earthquake and tsunami in Japan—and the consequent crisis developing at several of its nuclear reactors—has raised the concept of tail risk to widespread attention once again. Comparisons are being drawn with the BP Gulf disaster, Chernobyl, and the financial crisis. As befits one of the most earthquake-prone countries on Earth, it appears the Japanese built their nuclear reactors to withstand the tremors adequately. It seems, however, that they might not have adequately planned for the ancillary effects of a tsunami.
Failure to foresee and plan for all potential threats to a nuclear power plant—where the consequences of failure can be catastrophic—is indeed blameworthy. We should not misinterpret Donald Rumsfeld's apt characterization of the state of our knowledge to excuse us from paying attention to known known risks and known unknown risks. For denizens of an island nation, tsunamis should come as no surprise. But make no mistake: no tail risk can be completely mitigated. That is the nature of the tail: there is no upper limit to the magnitude of the potential threat. And just because we estimate that an event of certain magnitude should only occur once every 1024 years does not mean it will not happen tomorrow. Or this evening at 6:53 pm.
More generally, we cannot defend ourselves against even all the potential threats we are aware of or suspect. Such protection could only come at unconscionable cost. Do you want to avoid accidental death?: Don't drive, or cross the street, or use a gas stove, or live on a planet subject to earthquakes, tsunamis, and the occasional killer asteroid. The analogy is exact with our polity and economy, too. Every good and financial return we enjoy is associated with a host of risks, many of which, in the assumed unlikely event they occur, would cause most of us to question why we wanted them in the first place. And those are the ones we know about.
No, tail risk and periodic resulting disasters cannot be fully avoided or even reduced at tolerable cost. The existence and ineluctability of tail risk should teach us two things: radical humility, and the imperative to live life now, while it is still in our grasp.
For we all know we're going to die sooner or later. We just don't know whether it will be before the arrival of Chicxulub II or not.
No man is an Iland, intire of it selfe; every man is a peece of the Continent, a part of the maine; if a Clod bee washed away by the Sea, Europe is the lesse, as well as if a Promontorie were, as well as if a Mannor of thy friends or of thine owne were; any mans death diminishes me, because I am involved in Mankinde; And therefore never send to know for whom the bell tolls; It tolls for thee.
— John Donne, Meditation XVII, Devotions upon Emergent Occasions
© 2011 The Epicurean Dealmaker. All rights reserved.
