Risk, Black Swans, and Brown Turkeys

Thomas S. Coleman PhD
Close Mountain Advisors LLC
U.S. Expatriate Investing: Risk vs. Reward
in an Uncertain World
Paris, 14 January 2012
Sponsored by AARO

• Originally intended to talk about quantitative risk
management – from my book A Practical Guide to Risk
Management (CFA Institute)
• But risks today are macroeconomic, political, policy
• Big, existential risks of sovereign debt default, currency
devaluation and debasement, inflation.
• Need to put all this in historical perspective.
• Seems new and strange only because our collective memory is
• What I hope I'll leave you with
• Some optimism – we've been here before, and we'll recover
• The main risks are political – that politicians will fail us
Coleman 3
Why Black Swans and Brown Turkeys?
• Black Swans – New and unpredictable events
that up-end received wisdom
• Brown Turkeys – Unpredictable and surprising
but it's happened before
• Today's financial turmoil is a Brown Turkey
• Turmoil, but we've been through this before – and
• Some of the specifics I'll talk about
• Sovereign debt default across the centuries
• Banking crises across the centuries
• FX crises

Who am I?
• Educational Background
• Physics undergraduate at Harvard, PhD economics
University of Chicago
• Taught economics and finance for four years
• Practical Experience
• Over 20 years ago moved from academics to finance
• Trading and quantitative model-building on a
derivatives desk
• More recently founded and managed a macro-global
hedge fund
Coleman 5
Risk and Uncertainty
• What is Risk?
• Possibility that P&L is different from what is expected
• P&L Distribution

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