Black Swan and the Story of Risk - Literature review Example

Black Swan and the Story of risk Table of Contents Introduction 3 Technical Book- Detailed Analysis of the story, “Against the Gods- The Remarkable Story of Risks”: 3 Article related to the book: Crisis in Ukraine 4 Non-fiction Novel: Detailed Analysis of the story, “The Black Swan- The Impact of the Highly Improbable”: 6 Article related to the novel: Events in Ukraine 7 Works Cited 10 Name of the Student: Name of the Professor: Course Number: Date of the Paper: Black Swan and the story of risk Introduction This paper highlights and provides a detailed analysis of a book and novel -- Against the Gods: The Remarkable Story of Risk and The Black Swan: The Impact of the Highly Improbable -- respectively. The book and the novel contain concepts, which can be related to the present day crisis in Ukraine. The information can also be connected to articles present in The Wall Street Journal, Forbes, Reuters and others. These newspapers offer proper articles that explain and can be rightly related to the content of the book and the novel. The report explicates concepts of the novel and the book through present day events that have taken place in Ukraine and are often mentioned in various sections of the articles as stated above. The detailed analysis of this paper is made below. The analysis will help with a clear picture of present market conditions as well as failure of the Government that gave rise to problems of Black Swan market. Technical Book- Detailed Analysis of the story, “Against the Gods- The Remarkable Story of Risks”: The technical book, Against the Gods, narrates the story of thinkers whose ability to perceive remarkably helped to defy the Gods and probe the darkness in search of light (Bernstein 35). The author highlighted ways through which thinkers helped to transform attitude towards the risk by showing people the way to understand risk, measure it and weigh the final consequences (Bernstein 35). They wanted humans to gain passion for participating in risk taking games and emerge as better survivor of risks. The book foregrounds traces of various theories so as to judge market conditions and act accordingly, like, the Game Theory, the Fibonacci Numbers, Chaos theory, Regression to the mean, Bell curve and many more. The basic aim of the author is to liberate the world from soothsayers of the past through usage of powerful tools and techniques to measure the present risk. The aim of this book is to make investors aware of the fact that risks can be controlled in the recent times. As per the book, the author mentioned about inventors who formulated better ways to remove the strong barriers in the way of measuring and controlling risks (Bernstein 35). They propelled people to take risks after judging them, which can lead to their social and economic progress. The book was highly accepted worldwide as investors were able to relate to the practical contents of the book and also received good reviews from the Wall Street Journal. Article related to the book: Crisis in Ukraine Risk is an unavoidable part of the market and can have a huge impact globally. Therefore, it is necessary to deal with any kinds of risks in a logical and practical manner. In the past, risk was a narrow concept associated with gambling taking place between two or more parties, where luck played a great role. It is no longer the same and is associated with the global market, where the critical conditions in one country’s financial system can have direct impact on all countries worldwide. Concepts of these two books can be related to the events that took place recently and are published in newspapers like, Bloomberg, Economists, Rueters, Financial Times and many others. The most recent financial crisis took place in Ukraine, which affected the global economy severely. An article presented in Reuters gave details about the turmoil in global markets due to the crisis in Ukraine. It described the impact of this crisis on stock markets from Wall Street to the country itself, which is responsible for the rise in natural gas prices as well. The growing crisis in Ukraine is playing a major role in unsettling investors and making them nervous about the shaky market economies (“Markets”). The greatest impact of this crisis was on the markets of Russia and Ukraine. These conditions led to a sharp fall in Moscow’s benchmark index, Micex to 10.8 percent. According to the reports of March 3, 2014, in Reuters, the Russian monetary unit, ruble, fell to a record low against the value of dollar, leading to spread of concern among the nearby countries of Ukraine like, Poland, Turkey and Hungary (“Markets”). The Russian Central markets in response to the turmoil in Moscow announced their decision to temporarily raise the benchmark of their targeted interest rate from 1.5% to 7% (“News”). The decision was primarily taken to reduce risks related to inflation and financial instability, which had aroused from the increased market volatility. The developed markets were also affected by the recent financial crisis, as shares of the developed markets sank drastically, especially of those companies that are exposed to Ukraine and Russia. There are many European blue chip companies whose Euro Stocks 50 index closed down to a rate of 3 % (“Markets”); on the other hand, the Dow Jones industrial average lost 153.68 points, which is approximately 0.9%, to 16168.03. Another big drop was witnessed by the Standard and Poor’s 500 stock indexes since Feb 3, 2013. The rate can be calculated as 0.7% to 1845.73, which indicates a fall of 13.72 points. The Nasdaq index was also struck with a fall of 30.82 points and approximately 0.7% to 4227.30 (“Europe Relies Less on Russian Gas Than Before.”). Thus, the investors are moving into assets, which are traditionally safer, like, Japanese currency and United States bonds. Current market condition is creating risk for the short-term as well as long-term investors, but these risks can be curbed as per the ways chalked out by authors of books like, Against the Gods and The Black Swan (“Markets”). The authors rightfully mentioned in their books about unpredictable market conditions, which are prevalent for long and ways by which the investors can take part in these market related games, judge them and act accordingly in order to enjoy their required economic benefits. As per the author, in contemporary world, the risk can be controlled unlike in the past. He intended to make our society more practical in dealing with the risks and have tried to liberate our society from words of soothsayers by using powerful tools and techniques of risk management presently available. The author had begun with the ancient times, where there was usage of probabilities and numbers, gradually leading towards the new world of portfolio theory, techniques of risk management and derivatives .The condition of Ukraine is the best example that indicates the changes in modern economy, where various measures can be easily taken by the banks and investors in order to control this critical situation prevailing in the country. The governments of countries affected by Ukraine is repeatedly taking measures to slowdown these effects of risks related to financial institutions and safeguard the fragile conditions of investors. Currently, the investors, as per the reports in Reuters, are also more aware as they have started moving into assets that are traditionally considered safer, like, Japanese currencies and United States bonds (“Markets”). All these help to prove the considerable relevance of the book with real life market situations. The book’s ability to justify the controllable aspects of current market situation against the traditional illogical ways of soothsayers to judge the risk is completely commendable and can be matched to the ongoing crisis of Ukraine. There were no soothsayers who had forecasted the events of war followed by the financial crisis in this country. The only savior was the government and banks of the different countries, who adjusted their financial instruments and rates as per the current need. The investors and banks have now more opportunity to control their finances because of introduction of various tools, which help in taking measures for controlling the cash inflows, risks and other factors. Hence, this book has great acceptability all over the world and good reviews as per newspapers like, The Wall Street. Non-fiction Novel: Detailed Analysis of the story, “The Black Swan- The Impact of the Highly Improbable”: The report also highlights details about a novel, in the Non- Fictional category, The Black Swan- the Impact of the Highly Improbable. The Black Swan theory refers to events which are uncertain and unexpected and are of great magnitude. There are various unforeseen conditions that play major role in markets than the regular occurrences (Taleb 42). In this prophetic and groundbreaking novel, the author upholds in a good-humored manner that events related to the Black Swan explain approximately all aspects of our world; yet, people and specially the experts are blind to them. Through this novel, the author provides advice on how to approach the world in the face of uncertainty and still enjoy life (“Markets”). The author basically wants to bring forth robustness to deal with negativities that exist in the market and efficiently exploit the positive ones. The story deals with risk and effects that it has on life. The book substantially assists in motivating people to deal with the risks prevalent in the market and also provides details about its impact on their life and the ways to overcome them. The Black Swan events take place mostly because humans have a tendency to take into consideration what is known to them and fails to comprehend those that might happen and are unknown to them. The nature of human beings is truly depicted by the author (Taleb 42). He is right with his judgment that human beings have the typical tendency to feel that they know everything and hence, fail to take into account the vital aspects, which can affect them in the long run. In the past, there were various incidences of failures due to human avoidance of future consequences. The novel received good reviews from newspapers like, Reuters. Article related to the novel: Events in Ukraine The events of the novel can be related to the article of Bloomberg, which provided news about the events of Ukraine and its consequences on various countries, including United States of America (USA), Poland, Turkey and Hungary. The Black Swan effect can be identified in the crisis that has taken a toll on the country of Ukraine. As per reports in Forbes and Bloomberg, the escalation or increase in the present crisis of Ukraine might hurt sentiments of investors and tempt them to cash in the profits from portfolios of stocks that they have or seek the safety of their assets like, the U.S. Government debt. Therefore, there might be a Black Swan moment for the stocks of the country, Ukraine. The country probably had never predicted such chain of events that had taken place recently, disrupting the smooth flow of economic activity of the country. Hence, the current market condition of Ukraine rightly has similarities to the Black Swan event, which was popularized by the former Wall Street trader and finance professor, Nassim Nicholas Taleb. There were several polls conducted by Reuters, which showed that multiple leading investors in the world have already started to cut short their exposure to stocks in the growing markets of Europe to a five month low due to their concerns about the tensions prevalent in countries of Ukraine and Russia (“News”). As already mentioned above, there are many European blue chip companies whose Euro Stocks 50 index closed down to a rate of 3 % because of the financial crisis created by the war in Ukraine (“Markets”). On the other hand, the Dow Jones industrial average also lost 153.68 points, which is approximately 0.9%, to 16168.03, recently. The biggest drop is witnessed by the Standard and Poor’s 500 stock indexes since Feb 3, the rate can be calculated as 0.7% to 1845.73, which indicates a fall of 13.72 points. All these were not forecasted earlier and thus, can be related to the Black Swan theory. The NASDAQ index was also seen to be adversely impacted. It had a fall of 30.82 points and approximately 0.7% to 4227.30 few days back (“Europe Relies Less on Russian Gas Than Before.”). These factors are responsible for the financial instability of not only Europe, but also of the global economy. It is necessary for the analysts to curb these problems for eradicating any further losses in the future. The investors are gradually moving into assets, which are traditionally safer, like, Japanese currency and United States bonds (“Markets”) as already stated before. This crisis has also given the energy market a reason to worry about owing to the fact that a large part of natural gas of Russia for Europe moves all the way through Ukraine. The Black Swan effect can also be witnessed from the rise of unanticipated prices of natural gas by 6 percent in the markets of Britain. The shares of the company, Gazprom, who is considered as monopolist of the Russian gas market, has also fallen to 10 percent as the business in Ukraine, which was its major customer, had fallen apart. Another company whose oil prices were seen to rise was Brent Crude, whose futures were traded in London and this added up to 1.9 percent (“News”). This increment in the prices with each day can be related to the fact that Russia has changed the route that passed through Ukraine by opening a pipeline in Nord Stream, which bypassed the country. So, these were the additional reasons responsible for the Black Swan effect as described in this novel. Some experts stated that in order to cope with the present situation of Ukraine, a modern day equivalent of the Marshall Plan is needed. The Marshall Plan was used in the past by the United States to reconstruct the European countries, after the outbreak of World War II. It is now necessary for Germany to play the similar role as that of US during that point of time. Even so, there are some experts who were highly against this plan (“Markets”). This financial crisis in Ukraine requires immediate notice so as to solve the problems and furor created by the same in the stock market. The government of Ukraine should take the necessary actions in order to curb this problem within the least time. Thus, this was rightly a Black Swan effect that has taken place in Ukraine due to lack of proper forecasting done by the government as well as the analysts hired by the country. The lack of notice and inadequate forecasting of the government of the country have affected financial markets of nearly all countries related to Ukraine. This novel, Black Swan – The Impact of Highly Improbable, has experienced great popularity as per various newspapers such as, Wall Street, Forbes, and others, given that it can be related to the various events that had taken place in the past as well as the present (“World”). Both the book and the novel in the Non–fictional and Technical genre, respectively, are quite relevant, considering the current circumstances in the world; and can be related to the events of Ukraine that are highlighted in the articles of Bloomberg, The Wall Street Journal and Forbes. Works Cited Bernstein, Peter L. Against the Gods: The Remarkable Story of Risk. Hoboken: John Wiley & Sons, 2012. Print. “Europe Relies Less on Russian Gas Than Before.” The Wall Street Journal. Dow Jones & Company, 2014. Web. 5 March.2014. “Markets.” Forbes. Forbes, 2014. Web. 5 March. 2014. “Markets.” Reuters. Thomson Reuters, 2014. Web. 5 March. 2014. “News.” Bloomberg. Bloomberg L.P., 2014. Web. 5 March. 2014. Taleb, Nassim Nicholas. The Black Swan: The Impact of the Highly Improbable. London: Penguin UK, 2008. Print. “World.” Reuters. Thomson Reuters, 2014. Web. 5 March. 2014. Read More