Book review: “The Fat Tail – The Power of Political Knowledge for Strategic Investing”

“The Fat Tail: The Power of Political Knowledge for Strategic Investing”, written by Ian Bremmer and Preston Keat of Eurasia Group, is the first book to identify the wide range of political risks that global firms face and show investors how to effectively manage them. It reveals that while the world remains exceedingly risky for businesses, it is by no means incomprehensible.

The authors show that political risk is easier to analyze and manage than most people think. Applying the lessons of world history, the authors survey a vast range of contemporary risky situations, from stable markets like the United States or Japan, where politically driven regulation can still dramatically effect business, to more precarious places like Iran, China, Russia, Turkey, Mexico, and Nigeria, where private property is less secure and energy politics sparks constant volatility.

The book sheds light on a wide array of political risks-risks that stem from great power rivalries, terrorist groups, government takeover of private property, weak leaders and internal strife, and even the “black swans” that defy prediction. But more importantly, the authors provide a wealth of unique methods, tools, and concepts to help corporations, money managers, and policymakers understand political risk, showing when and how political risk analysis works.

In recent years, investors have increasingly recognized that politics matter at least as much as economic fundamentals in many markets. To succeed in the current global marketplace, investors must look beyond reassuring data about per-capita income or economic growth and assess the political risk of doing business in particular countries-sector by sector and project by project.

Eurasia Group proposes four essential dimensions of political risk to examine in a country:

1) the stability of a regime and strength of its government;
2) personal and state security, and how prepared government is for future potential disasters;
3) social trends, such as demographic shifts and growing income gaps; and
4) economic factors, such as unemployment, debt, and the openness of the economic regulatory environment.

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