Last time, I spoke about the need to look at climate models with less bias, emotion, and anxiety so that we can derive insightful and constructive actions from them. (You can read the first part HERE)
This post, I’ll look at the Wall Street concept of options, a class of investments that takes uncertainty into account. What’s interesting about options is that traders acknowledge risk, luck, and the lack of control on the front end in order to inform their actions on the back end.
Take this example. Making a decision about where you are going to live based on a climate model that’s guaranteed to be wrong is like putting all your money on one stock and hoping it will make you a millionaire. (I want to stress that while I feel all climate models are guaranteed to be wrong, that does not make them useless, just as long as we go in knowing where they are flawed.)
A Quick and Easy Risk Analysis
So what do you do? You invest in options. Not stock options, but options that mitigate risk in the areas of your life you deem will be affected negatively by climate change. Doing this correctly will give you the highest chance of adaptation going into the future. Here are three scenarios I envision that are worth thinking about:
- Business as usual
- A glaciation situation
- A world desert situation
I’ve seen information pointing to all three of these scenarios. When doing risk analysis, it’s important not to get bogged down on what will cause these scenarios, because getting stuck into the “why” becomes a distraction. All we have to think about is the worst case scenarios before answering a few simple questions. I call this the Black Swan Analysis:
- What is the scenario we are concerned about?
- What is the likelihood of this happening? (Not probable, probable, highly probable)
- What is the consequence if this scenario happens? (Non-catastrophic or catastrophic)
- What are the major upsides or downsides of this event happening and how can you benefit from it?
Any scenario that is probable or highly probable when it comes to catastrophic outcomes is worth insuring against. Let’s go through the above scenarios once more.
Scenario 1: Business as Usual
What is the likelihood of this happening? Between probable and not probable.
What is the consequence if this scenario happens? Non-catastrophic.
What are the major upsides or downsides of this event happening and how can you benefit from it?
- Continue to run businesses as usual.
- Make money on the stock market.
- Live a high-tech, low-labour life
- Don’t worry about anything too much.
Obviously, this scenario is not worth investing any time into and is not a future worth taking out insurance against. Basically it is a do-nothing situation.
Scenario 2: Glaciation
What is the likelihood of this happening? Between probable and not probable.
What is the consequence if this scenario happens? Catastrophic. Humanity would have to move to a very small tract of land not under ice. Starvation, war, die-off, loss of massive amounts of technology and human knowledge would ensue. While the probability is low, the outcome will definitely be dire.
So this is worth putting some thought into – what are the options that you can invest in to provide you with a fleeting chance of adaptation? What are the major upsides or downsides of this event happening? How can you benefit from it?
- A large portion of the population will not know how to grow food.
- People will be forced to move to places that have typically not had a glaciation in the past.
- A general lack of basic skills will hinder the majority of individuals.
I’m sure there are more issues you can continue along if this is a risk you’re trying to sort out. Options that you can invest in (depending on your budget and goals) include the following:
- Learn how to grow food.
- Do not get emotionally tied to one place on earth.
- Buy a place in the tropics or subtropics and move there, especially if it is not too expensive.
- Learn basic skills that can give you a competitive advantage in the future.
- If you’re smart, you’ll try and find skills that will benefit you both in the present as well as the future.
Focusing on the Right Things
I’m not going to go through the third scenario – you can do that on your own. Basically, the goal of investing in options is to find what Nassim Nicholas Taleb calls “barbell options” or “asymmetric options”. These are options that will be
- at best, a benefit to you in the present and in the future.
- at the worst, be neutral now and neutral in the future.
We do not want to invest in options that will hurt us now and hurt us in the future if we are wrong. Here’s an outcome matrix to help you think about this:
We want our outcomes to be focused on the green and in some scenarios the yellow. A lot of decisions I see being made by people around me who say that they are concerned are focused in the red and yellow zones.
Now, I suspect that some of you will disagree with some of the items I have placed into some of the categories below, and I welcome your feedback and am definitely open to changing the categories. I hope they will at least give you a sense of what I’m trying to get at.
My point in all of this is that yes, things can get bad. That has always been the case and will always be the case living on a spinning rock hurtling through a chaotic universe. It’s important for us to explore possible scenarios with models because that’s what we humans do. But it’s also important to understand their weaknesses and not get stuck inside them so that we can create sensible insurance policies that allow us to live in the present while making smart decisions that may benefit us in the future, all without sacrificing the only time we have: NOW.
On Hope
I recently did a multipart series on YouTube on climate change, which you can watch below; it was my attempt at spinning this whole fiasco into something a little more positive and constructive.
I want to leave you with a positive note. Dr. Rattan Lal has been doing a ton of research on climate change as it pertains to soils and agriculture. Here’s one of his quotes:
Humans are adaptive. We always have been and we will continue to be. There is hope amidst the sea of uncertainty – you just have to search for it.
Interested in more articles on insuring against uncertainty? Here are a couple of posts I’ve done in the past relating to this topic:
- Land as Insurance – https://vergepermaculture.ca/2017/02/21/land-as-insurance-part-1/
- Building Enduring Assets – https://vergepermaculture.ca/2015/11/27/building-enduring-assets/
Our 2018 schedule is up! Check out all the courses, events, and programs Verge has to offer: https://vergepermaculture.ca/courses-events/
