On my first day in the money management business, my new boss invited me into her large corner office with its expansive views. She was Director of Macro Research, and her cheerful, kind, wise demeanor had been an important factor in my accepting the job of Asia ex-Japan Macroanalyst despite having never visited Asia, studied macroeconomics, or invested in stocks or bonds. I was eager for any guidance she could offer. On that day, she gave me a list of people I should meet then handed me a thick package detailing my benefits. She then offered one piece of advice: Put all of your retirement savings in the stock market and leave it there because the market goes up over time.

That last bit of advice struck me as peculiar. On the one hand, it was kind of her to guide me, to look out for my financial well-being. On the other hand, wasn’t I there to figure out whether markets were going to go up or down? I had spent the previous dozen years in far less glamorous environments learning how and why some organizations, cities, markets, and whole countries had gone terribly wrong. I had figured that these experiences would be useful to my colleagues and the firm’s clients. If the markets were just going to go up anyhow, though, what was I doing there? This optimistic, “everything will work out” attitude was perplexing. It seemed too good to be true, but what did I know? It was 1999 and it felt like I had just arrived at a nice party full of people who had had one or two drinks. 

As I came to appreciate in the coming years, that bit of personal advice was a powerful insight into the mindset and business model, of not just the firm I was working for, but of the U.S. money management industry since the 1990s: The stock market’s going to go up no matter what, but you can get very rich trying to make the good times even better. 

I have been revisiting this era recently because I am very worried about the future and notice that the financial markets are not. Finance is supposed to be one of the few sectors of society that is entirely focused on what lies ahead, but if the people, the industry’s institutions, products, and regulations, and especially its culture are all biased toward the assumption that everything is going to be fine, waiting for markets to signal danger ahead is a bad strategy. It’s unwise to expect people who have only experienced good fortune to foresee misfortune. 

For 25 years, I was glad that I had followed my boss’s advice: The stock market did go up, and my fortunes went up with it. But all of that good fortune was built on a stable climate, a mild political environment, and an inherently optimistic institutional structure. Now? It’s time to think more critically and imaginatively. I have some stories that might help.

Another side of the tracks

The first time I went to Russia, I had to bribe my way in. 

From 1987 to 1991, I researched the declining state of American manufacturing, worked in two dysfunctional factories, and walked through and studied the histories of some of the worst public housing in Chicago. Those experiences sent me on a quest to find places where life was orderly instead of chaotic, manufactured goods were reliable, and everyone could expect to join a robust middle class. So I learned German and applied for a research grant. In Germany, I made friends with Paul and Josh, two similarly restless Americans who had also received research grants (Paul to study the German Romantics; Josh to learn how Germans taught their children about the Holocaust). After a few months of German predictability, we were tempted to experience Russia as the Soviet Union transmuted into something unpredictable. We just needed visas and train tickets.

Visas required a formal invitation from a Russian citizen who would vouch for the applicants and be responsible for their good behavior when in Russia. We didn’t know any such Russian citizens, but Josh’s stepfather was volunteering in Moscow helping Jewish people brutally suppressed under Soviet rule to reestablish synagogues. He was happy to write a letter of invitation but made no promise that it would do the trick. I lived nearest to the Russian embassy in Bonn, so Paul and Josh mailed me their passports and the letter of invitation. I was nervous as I walked up to the embassy counter when my number was called.

In hindsight, I feel great sympathy for the man behind that counter. It must have been a bewildering time for him. He had been educated and trained in the USSR, had joined the Soviet diplomatic corps to serve the state, had been a gatekeeper on the front lines of the Cold War, and now was doing what exactly? Representing a country that wasn’t sure what it stood for or who was really in charge? What was his mission? Whom should he keep out, and whom should he let in? More fundamentally, would the nearly bankrupt Russian state be able to pay for him to keep living in Bonn? I can’t imagine how trivial he would have found my anxiety.

At that time, however, I doubt that I had very emotionally intelligent thoughts about his interior life. I was a 22-year-old American bringing three U.S. passports and a dubious letter to a Russian authority behind bulletproof glass. I explained in my best formal German that my friends and I wanted to visit Russia for a month and that we had a letter of invitation. He silently pointed to the opening in the glass, and I slid the four documents through to the other side. He looked at the passports, looked at the letter (which was written in English), and looked at me with what I interpreted as bureaucratic disinterest. “Is everything in order?” I asked. He shook his head. I then discreetly revealed the 200 Deutschmarks (about $120) I had hidden in my left hand and asked if there was anything I could do to make it in order. He pointed to the opening in the glass. Ten minutes later I had the visas and felt about as cool as I ever had. I was a grownup. I was doing something dangerous. I had bribed a Russian diplomat! In my self-congratulatory state, I accidentally left the case containing our passports on the train when I disembarked, only to be saved by a trustworthy German who gave them to a train official, who put them in what was probably the world’s best-run lost and found. I retrieved them a couple of hours later, humiliated both by having screwed up and by the reminder that my most distinguishing characteristic was not courage but good fortune.

We bought tickets as far as Warsaw because tickets to Poland were inexpensive. Understandably, the cash-strapped Russian rail system was charging high prices to German buyers, but Josh had heard a rumor that every Russian railcar had a kind of steward who managed the car and could be bribed to give passage much more cheaply. Given the success of my first bribe, this sounded great to me. (I didn’t tell either of them about the lost passport snafu.)

In the Warsaw station, we found a train bound for Moscow and, after one or two unsuccessful attempts, seemed to reach an understanding with a kind woman standing next to a railcar entrance who spoke none of the languages that we spoke. Looking over both shoulders, she quickly led us into a sleeper compartment, took our money, and made signals that we understood to mean “stay quiet and keep the door closed.” A little while later, the train started rolling. We were giddy with a sense of adventure.
 
Around 2 a.m., when the train stopped at the Poland-Belarus border, armed Russian soldiers came to our cabin and took our passports, closed the door, and left. Shortly thereafter, our car was hoisted up about 10 feet so that the undercarriage could be changed from the 4’8½” European gauge to the 5’ gauge that the Russian Tsar chose in 1842 on the recommendation of American engineer George Washington Whistler. We dangled in the air, and from that vantage point we could see that there was some kind of unruly commerce going on outside. People were buying, selling, and shouting at each other in the dim light of the border railyard. We surmised that it was a kind of informal night market to avoid customs duties. We worried that we would soon be kicked off the train into this scene, possibly without our passports.
 
Paul, Josh, and I were not kicked off the train; the soldiers came back to our cabin and gave us our documents; and we wound up having an amazing, memorable adventure thanks to people who were clearly taking risks by offering us hospitality. Russia taught me that the spectrum of hardship, confusion, anxiety, and bewilderment was far wider than any recent American experience. I hadn’t yet read any Tolstoy, but this trip would be my first exposure to the opening line of Anna Karenina, “All happy families are alike; each unhappy family is unhappy in its own way.” 

This experience was crucial to my understanding of the world as it is and, more importantly, as it could be. One of the most valuable skills a person can have is the ability to imagine how things can go badly. Optimism is a winning strategy during good times, but when we assume that they’ll keep rolling, we grow complacent, unimaginative, and vulnerable to lean futures.  

Life inside the box

That youthful adventure in Russia motivated me to widen my aperture of interest to include tragedy, corruption, and evil. But as I settled into the investment business in the early 21st century, I realized that people’s interests were one-sided: They were almost exclusively interested in things that would go up in price. One little artifact sticks in my mind. Around 2002, dozens of copies of a hardcover book appeared around the firm. I never learned where they came from, but for years I would notice them in odd places, as if a financial Johnny Appleseed had tossed them around. The book was called The Triumph of the Optimists: 101 Years of Global Investment Returns. 

The book was filled with tables, charts, and graphs that sliced and diced financial markets into subcomponents, drivers, and correlations. The sheer mass of numbers offered what appeared to be overwhelming evidence that the arc of history bends toward wealth. If I hadn’t been inside the financial markets, I would have just seen this as a boring text, but between the late 1990s and the mid-2020s, the investment management industry underwent a strange, magical transformation: It became like the book. Capital markets and their practitioners were reduced to a collection of charts and graphs, fragmented into ever-narrower benchmarks which were then “productized” into specific “betas”—boxes outside of which neither computers nor human analysts had any incentive to think. Led by consultants and digital tools, the investment world became ever more self-referential—investment performance was not measured principally by risk and return but by performance relative to a benchmark and relative to competitors. As rising markets became an assumption, and as the optimists triumphed, the driving force of the business became financial FOMO.

These changes in the industry were accompanied by changes in the culture and mindsets of the people in charge. Rising markets pushed optimists to the top of the industry, while worriers and people who thought imaginatively about the future were pushed to the margins. The world’s biggest asset managers, Blackrock, Vanguard, and Fidelity, grew by offering more and more financial products that packaged together optimistic assets for customers. As I once said to Blackrock’s CEO, Larry Fink, “Congratulations on getting rich in the easiest time in human history to do so.” 
 
My predecessor at the investment firm was hired in the middle of what was then known as the Southeast Asian Miracle. Stock markets from Indonesia to South Korea rose to exciting heights, and he became a cheerleader for their continued rise.
 
When the Asian Financial Crisis started, he told the firm not to sell. When the Thai baht collapsed, he said it was a brief panic and that the Asian Tigers would soon be roaring again. It got worse. He would come to work early, close his door, and stay in there all day, sending out occasional emails insisting that the crisis wasn’t really happening, only leaving his office after everyone went home. He had taken optimism to its extreme illogical conclusion: outright denial of reality. I have been thinking about him recently as I watch other optimists reckon with risks that have been growing for years. 
 
Finance is supposedly an objective, unemotional industry that weighs risks and returns, but rising markets do strange things to people. Being associated with a stock, an asset class, or a whole region of the world whose prices are rising makes investors in those areas feel special. It makes other people see them differently. It attracts new people to them. It gives them an air of authority even outside their domain. It tends to make them more concerned with their status among the other investors whose fortunes have risen. It becomes harder to envision bad times, even after they become visible. For decades, U.S. markets have kept rising, risky bets have looked smarter and smarter, and ever more attention has been lavished on the supposed geniuses who were associated with the biggest winners. Not surprisingly, new people flocked to finance, since what could be better than getting rich from betting other people’s money on a game that always produced a payout? 

Mountains of golden crumbs

It wasn’t always so. Before that first day in my new office as Asia ex-Japan Macroanalyst, most of what I knew about the bond market came from Tom Wolfe’s The Bonfire of the Vanities, a tale of 1980s New York City finance, social stratification, justice, and injustice. Recently, I reread it. It’s juicy and brash, full of broad stereotypes and sharp observations about human nature. But the thing that strikes me now is the looming sense of peril in society in general and the financial markets in particular. Wolfe’s wealthy characters are keenly aware of the surrounding risks posed by a New York City full of poverty and crime, and the bond market looks like a wild game of chance. 
 
The main character is Sherman McCoy, a bond salesman at fictional New York investment bank Pierce & Pierce. Bond salespeople make money by helping investors who own bonds sell them to another investor or by buying bonds speculatively and selling them quickly at a higher price. At one point Pierce & Pierce buys $6 billion worth of U.S. government bonds at $99.62643 per $100 and sells $2.4 billion of them at $99.75062 later the same day. The $0.12419 difference made them a fortune.
 
To Pierce & Pierce, it meant a profit of almost $3 million for an afternoon’s work. And it wouldn’t stop there. The market was holding firm and edging up. Within the next week, they might easily make another $5 to $10 million on the 3.6 billion bonds remaining.
 
By five o’clock, Sherman was surging on adrenaline. He was part of the pulverizing might of Pierce & Pierce, Masters of the Universe.
 
Squeezing out those 12.419 cents on the dollar is interpreted on the trading floor as an act of skill and daring. Yet “the market was holding firm and edging up” is finance speak for “interest rates are going down,” which is a technical way of saying that virtually every asset is rising in value. Wolfe, his fictional characters, and all of the actual people in finance had no idea that interest rates would fall for the next 40 years. 40 years! The market was essentially a one-way bet for entire careers. Starting in the early 1980s, people in finance kept experiencing one windfall after another, only briefly interrupted by what gradually became known as “dips.” Even the so-called Global Financial Crisis of 2008 proved to be a buying opportunity once the government bailed out the banks and insurance companies. Over and over again, the investors who bet on the upside were rewarded—and promoted.

The feeling of power, might, and superiority that Sherman and the other members of this group’s real-life inspiration felt at this time has had a lasting impact on our society. When we meet Sherman, he has started referring to himself as a “Master of the Universe” because of the large sums of money he makes in commissions. In truth, though, the job of bond salesman is a mix of middleman and short-term speculator dealing in decimal places. During a family outing on a beautiful day in the Hamptons, Sherman’s six-year-old daughter Campbell asks him a pointed question, “Daddy, what do you do?” She has just learned that the daddy of her playmate MacKenzie makes books and employs 80 people (he runs a publishing house), which causes Campbell to realize that she doesn’t know what her daddy does. She is eager to learn so that she can have the same daughterly pride as MacKenzie.
 
What follows is painful for both Sherman and Campbell. He’s not sure where to begin and immediately uses arcane terminology. Campbell starts to get the uneasy impression that her father’s employment doesn’t make any sense. Eventually, he manages to say: 

“A bond is a way of loaning people money. Let’s say you want to build a road, and it’s not a little road but a big highway, like the highway we took up to Maine last summer. Or you want to build a big hospital. Well, that requires a lot of money, more money than you could ever get by just going to a bank. So what you do is, you issue what are called bonds.”
 
“You build roads and hospitals, Daddy? That’s what you do?”
 
“Well, in a way.”
 
“Which ones?”
 
“Which ones?”
 
To calm her increasingly distraught daughter, Sherman’s wife, Judy, steps in.
 
“Darling, Daddy doesn’t build roads or hospitals, and he doesn’t help build them, but he does handle the bonds for the people who raise the money.”
 
“Bonds?”
 
“Yes. Just imagine that a bond is a slice of cake, and you didn’t bake the cake, but every time you hand somebody a slice of the cake a tiny little bit comes off, like a little crumb, and you can keep that… If you pass around enough slices of cake, then pretty soon you have enough crumbs to make a gigantic cake.”
 
As interest rates fell, communism collapsed, markets expanded, and the Baby Boomers plowed their money into markets, the golden cake grew so huge that the millions that excited Sherman McCoy stopped being so impressive. Blackrock now manages about $12 trillion, Vanguard $10T, and Fidelity $5T. One would think, with assets in the trillions, these companies must have a lot of power. But those numbers are deceptive. As the cake grew, the slices got more orthodox and precise, and the clients (the people whose money the firms invest) changed their behavior. Instead of handing over their money to a guy in a suit and saying, “Invest as you see fit,” most chose to diversify and focus on fees. The big winners in the asset management industry excelled at technology, marketing, and product innovation, selling index funds, exchange-traded funds (ETFs), and thematic funds. Many people look to these companies’ leaders for guidance, but their companies sell market access, not insight, and certainly not foresight. To them, the market—its investors, its companies, its risks—is a set of statistics housed in databases, expressed in spreadsheets, and informed by the recent past. It’s all very orderly, logical, and sterile.

Spreadsheets and Gogol

The second time I went to Russia, it was because someone else had accepted a bribe. 
 
After my year in orderly Germany, I moved back to Chicago and looked for opportunities to work with people who were trying to turn around urban decline. I was exceptionally lucky to get a job at the South Shore Bank as a credit analyst. The bank had served a largely Jewish community in the South Shore neighborhood for decades, following traditional bank practices: open only from 10 a.m. to 3 p.m. on weekdays with a half day on Wednesday. After Black families started moving into the South Shore in the 1970s and ’80s and the Jewish families moved out, the owners of the bank put it up for sale. A private equity firm offered to buy the bank on the condition that they could move it to downtown Chicago. In a surprising move, the U.S. Federal Reserve, the regulator of American banks, rejected the application. Black people in Chicago had been denied access to financial services for decades due to explicit discrimination (e.g., redlining) and implicit discrimination (e.g., ATMs in Black neighborhoods tended to only dispense cash, not accept deposits), and the regulator, recognizing the risk of this happening again, ruled that any buyer would have to keep the bank in the neighborhood. A group of bankers and socially minded investors seized the opportunity and bought the bank.
 
My job at the bank was to help commercial loan applicants get their paperwork together and prepare forms for the loan committee. Every week I would meet people who wanted to build or grow a business: Owners of restaurants, muffler shops, used car dealerships, and small manufacturing operations came in with their plans, their ledgers and accounts, and their hopes and dreams. Some were organized and crisp, others were more enthusiastic and impressionistic, and still others were fantastical. No matter how they came in, my job was to translate their story into spreadsheets for U.S. Small Business Association loan applications.
 
Shortly before I was hired at the bank, it started getting media attention. Bill Clinton and others pointed to it as a model of how business could provide vital social services. It was an inspiring story, and there was a good amount of truth to it, especially in the real estate department, but the commercial lending operations revealed a key challenge of modern business: Spreadsheets leave out—indeed often rule out—the unruly. 
 
I worked with applicants who wanted loans to finance everything from new shops to new hot sauces, but the loans that were approved were almost always for fast-food franchises. McDonald’s, Hardee’s, Domino’s, and the rest provided orderly forms to potential franchise owners that made it easier to start a business. Better yet, the risk to the lender was minimized. The trade-off was that the resulting businesses were not very good for the neighborhood—or even located in the neighborhood at all.  

The bank’s positive story kept growing, however, and one day, people from the European Bank for Reconstruction and Development (EBRD) called and asked, “Could you set up a program like this in Russia?” My boss’s boss’s boss, the head of lending, a man named Dick, absolutely should have said no. But if things have been going well, if people are coming your way, it’s easy to be optimistic, to wonder how things could get even better. And so, instead of saying no, Dick asked, “Could I get an all-expenses paid trip to Russia out of this?” 

I worked for the loan officers, smart Black bankers who were dedicated to the neighborhood. When Dick asked them if they’d like to move to Russia in a month’s time, they all said no. Instead of going back to EBRD and admitting that this neighborhood Chicago bank wouldn’t be able to kick-start small business lending in Russia, Dick asked me if I would be interested in moving to Nizhny Novgorod, Russia. The job started in three weeks.

The first few years of Russia’s transition away from Soviet life had been bumpy. In hopes of spurring commercial activity and prosperity in former Soviet lands, the EU and G7 had created the EBRD. But after a few years, the only obvious money-making investments in Russia—the ones that made sense on spreadsheets—were in oil and minerals, so by 1994, the money that had been raised to convince formerly communist people of the merits of capitalism had all gone to big corporations and their owners who were becoming known as oligarchs. The EBRD was desperate to demonstrate that it could raise the fortunes of everyday Russians, for which their best strategy, apparently, was calling a small bank in Chicago that rewarded their confidence by sending me—a 24-year-old who had never made a loan but had learned the language of American investors: the spreadsheet.
 
If I was finding it hard to communicate the potential of non-franchise small businesses in the Chicagoland area, imagine trying to do it in 1994 for brand-new small businesses in a Russian city far from Moscow where the high on an average January day was -20°F. My colleagues and I would say to the business owners who came in to apply, “Fill out what you expect your revenues and itemized costs to be over the next five years on this form.” Many of the applicants would take the papers, give an earnest nod, and go fill them out. Some, however, would stare at the rectangular spreadsheet with its orderly rows and columns, its crisp lines and right angles, and look at us with a weary, wry smile that captured how foolish our request was. Their lives had already included radical changes in authority, safety, and political ideology, on top of hard economic times. It wasn’t clear if they even legally owned their businesses or if the state could seize them at a moment’s notice. How could they possibly predict what would happen to anything five years from now? Some of them simply handed back the form and said, “You should just put whatever numbers you want in those boxes. I have no idea.”

I don’t think it’s possible to overstate how much spreadsheets and simple databases have shaped the world, especially American business culture. To a modern investor, the purpose of a corporation is to generate earnings, and earnings are captured on spreadsheets. Therefore, in essence, businesses exist to populate spreadsheets. A friend of mine who used to run a construction company and now teaches at a business school offered me a perfect illustration of this. He explained that there are two kinds of real estate courses at business schools: ones that teach about actual, physical buildings, and ones that only discuss financial models of buildings. The latter course is the more popular one.

A couple of years ago, I was invited by the chief risk officer of one of the world’s largest banks to give a talk about the impacts of climate change on financial markets. He had assembled the heads of each asset class at his bank. I detailed how risks would rise in low-lying places, in hot, humid places, in places that would become more prone to drought or fire or both, and in global financial systems like insurance, sovereign bonds, municipal bonds, and securitized lending. I explained that these risks were unprecedented because the climate had been so stable for the past several millennia and that every asset class would face new challenges. The people on the Zoom call nodded along, asked good questions, and were clearly concerned. Then we got to the crux of the matter. The head of mortgage-backed securities said, “This is all interesting, but I need to know what to put into my spreadsheets.” I explained that there was no one number, no one special column to add to capture climate risk, that it would require thinking in scenarios and dealing with genuine uncertainty. I had lost him. “If I can’t put it in the spreadsheet, it doesn’t exist,” he said.

In the winter of 1994, snow was piled so high that many of Nizhny Novgorod’s roads felt like canyons, which meant that come spring everything would be covered in slippery mud. One April day, my Russian colleagues and I set out to see an applicant who ran a brick factory. The driver, an enormous man whom I had often seen carrying a huge gun at the bank (this local bank was openly run by the mafia), drove the black, rear wheel drive Volga sedan with astonishing speed and control over roads that would have left Americans in Range Rovers calling for a tow truck. The owner of the factory, a clearly bright man in his mid-40s, gave us a tour of the rough but functional facility and answered our questions. As we got ready to leave, I asked him if there was anything else he wanted us to know. He smiled a smile I now associate with Russian spreadsheets and said, “Your decision is very simple. It’s like Gogol said, ‘Russia only has two problems: fools and bad roads.’ You have seen that my road is shit, so you only have to decide if I’m a fool.” We approved his loan.

Bad comps

Our financial institutions are run by extraordinarily fortunate people. During their careers, the best strategy has almost always been to take the risk, buy on the dips, and be optimistic. Yes, they still monitor risk, but the concept of risk grew ever more abstract, expressed in correlation matrices and deviations from a benchmark (what’s called tracking risk). In essence, virtually all of the risk in finance is now career risk: It’s not your money, and your investment is only a part of your clients’ assets, and you’re sticking close to the benchmark, so the big risk if you’re wrong about something is losing your bonus or maybe your job. In a setting like that, talking about the likelihood of mass extinction or even rising seas is akin to starting a watercooler conversation about death: The other person is either going to walk away or things are going to get deep. Indeed, the more I talked in investment meetings about climate change, the more colleagues and clients would come to me privately to talk about their kids, the farm in upstate New York that they were rewilding, their childhood memories, or their acceptance that their place on Cape Cod would be taken over by the ocean, not their descendants. Climate change was on their minds, but it wasn’t in portfolios they managed or sold to clients. 

I finally gave up on finance in 2015 after I heard former Goldman Sachs Managing Partner and U.S. Treasury Secretary Hank Paulson passionately tell a group of investors that “climate change could be as bad as the 2008 Great Financial Crisis.” He was comparing the likely death of hundreds of millions or billions of people, the dislocation of billions more, the death of trillions of other living organisms, and a very real risk that the changing climate will radically reshape all life on earth with an episode of excessive issuance of mortgages and collateralized bonds. Statements like these so dilute our sense of extremes (“crisis”) that every comparison is flattened. Also, the people in that room were certainly richer in 2015 than they were in 2007. For them, 2008 had presented yet another great buying opportunity.

I recently participated in a good conference put on by a climate-focused investment firm whose managing director set the tone with a series of dramatic PowerPoint slides. He made references to drought and fire, but the audience was a bunch of investors. They wanted numbers. And the number he offered them was $200B. The digits must have been 10 feet high on the huge screen next to the stage. The small print explained that this was an estimate of annual GDP losses if the atmosphere warmed to 3.0°C above the preindustrial average. But global GDP is already over $100 trillion. $200B in a few decades barely counts as a pile of prospective crumbs. The recent Los Angeles fires cost $200B. Numbers like these are the dangerous result of a well-meaning, dutiful effort to portray the future in spreadsheets and simple databases. I wish I could offer a more precise, insightful, realistic estimate of future economic costs of climate change, but the past offers scant statistical insight into the future we now face. 

Virtually all investment decisions and economic analyses are based on two-dimensional models. An analyst, investor, or economist creating such a model takes estimates from what he or she deems to be a comparable situation (a comp) in the recent past and applies those estimates into a slightly different context. Then comes the spreadsheet magic: Almost all such models take Year 1’s estimates of revenues and itemized costs and project them out into the future with the equation: [This year’s value] = [Last year’s value] x 1.02. In other words, every category of revenue and expenditure is expected to grow gradually, by about the level that inflation stayed during the glory years of falling interest rates. Some analysts might use 1.025 or 1.03 instead of 1.02, but the future of every variable in the spreadsheet is always smooth. 

This means that a cash flow model of a portfolio of assisted living facilities across coastal Texas, Florida, Georgia, and North Carolina that was created in 2020 took insurance costs from 2019 and projected them out to 2049 with small annual increases that remained proportional to all the other costs. What happens to that spreadsheet when insurance simply isn’t available any longer in those places? We are starting to find out. After I made a presentation to investors, the CEO of a company that managed exactly that kind of portfolio asked me, “Is climate change why I have to go to Lloyd’s of London in person to get insurance now?” 

Climate science tells us that the future will be very different from the past. Thanks to paleo climate science, we know that from about 10000 BCE until about 2012, the global atmosphere was in a stable, narrow temperature range around what is known as the preindustrial average. This range was bounded on the bottom by -1.0°C and on the top by +1.0°C, and its stability and narrowness made forecasting easy. Climate stability is the reason that the same plants grew in the same places for thousands of years and that we have bond markets. In essence, all the past economic and financial data, all those upward trends in prices, were enabled by the low volatility of the climate. 

A little more than a decade ago, we broke out of that range, and climate volatility began rising. Last year we crossed 1.5°C, and we can already see how natural and human systems are straining. The next 0.5°C of warming—which we should expect over the coming 10 to 15 years—will bring substantially more disruption and suffering. The probability of drought and deluge will rise substantially; it will be too hot and humid to be outside in places where hundreds of millions of people currently live; pests will be on the move, and plants will be struggling. It’s easy to foresee that these changes will eventually wreck many beautiful, smooth spreadsheets. I’ve talked to hundreds of investors who shake their heads when they see maps of these phenomena and nod their heads when I say it will have massive financial implications, but almost without exception investors then say that it’s not in their universe.

My universe

I think the biggest reason we shouldn’t look to investors for warnings about the future is that the modern investment industry warps how investment professionals see the world and what they worry about. I look back on my nearly 20 years in the investment business and can’t be sure that any analysis or recommendation I made really mattered. I am sure, however, that I woke up every day and checked the news and markets, terrified that I had screwed up in my (often fitful) sleep. If one of the investment recommendations I made to my colleagues went wrong, I agonized. At one point, I only half-jokingly compared my failure to anticipate the financial implications of a Taiwanese election to the deadly 1954 battle of Dien Bien Phu.

My mistakes were few and rarely noticed because I was covering China just as it became a massive driver of returns to markets around the world. I was a little bit ahead of the curve, mostly because my boss had put me there. But regardless of the reason, praise and golden crumbs came my way, and being “The China Guy” became cool. You might think that my good fortune would put me at ease, but over the ensuing years, as interest rates went down, markets went up, and pay rose, I was as anxious as ever, as were my colleagues. The reason is simple: Human beings can give anything high stakes. No domain is too narrow or isolated to feel like a whole world. Tom Wolfe likely had no idea how the real-world investment business would employ the word “universe.” 

Despite the fact that the word “universe” was coined explicitly to encompass the totality of all existing things not just on this planet but everywhere, modern investors commonly say things like, “My universe is small-cap growth stocks,” or “All the bonds are overpriced in my universe.” For years I wondered why a slightly less grandiose term like “solar system” or “galaxy” hadn’t been sufficient to capture their sense of reality, but after a while, I came to accept that they were using “universe” pretty accurately: They spent every waking hour obsessed with the stocks in their slice of Russell 200 or the S&P 500 or the MSCI World Index. Clients weren’t paying them to figure out the world, they were paying them to choose between one stock and another within an index, and not owning enough NVIDIA shares when they rose from $3/share to $140/share could feel like the end of the world.

This is the boring little secret of almost all of finance: The vast majority of modern investors aren’t masters of anything. They spend their time focused on a narrow field of vision, and yet to them, it feels like an entire universe. Their battles, their struggles, their wins and losses take an emotional toll. It can be very taxing to replicate (or do slightly better or worse than) an index that a computer could produce unemotionally while taking far fewer crumbs. It’s hard work to constantly interview applicants for venture capital funding, not knowing which will be “the next Airbnb” or a complete bust. It can be maddening to predict whether interest rates will go up or down now that 40 years of falling rates are over. It’s no wonder that it’s hard for investors to imagine that the planet could be in peril. That kind of thing is outside their universe.

Rich and powerful aren’t the same thing

The last time I went to Russia, the oligarchs were insanely rich, the bribes were everywhere, and everyone was looking over their shoulders.

Russia’s fortunes rose as China’s economic boom fueled demand—and a surge in prices—for commodities like oil, nickel, and other minerals. By 2007, my research agenda at the firm had widened, and I was curious how the influx of cash had affected the country I had bribed my way into 15 years earlier.

Those first loans my team and I made mostly paid off, but it got harder and harder to find borrowers who could handle the tumult and uncertainty caused by Russia’s economic and political instability, so the EBRD shut down the program. The monopolistic commodity businesses run by the new Russian oligarchy were the only safe bets. By the time I landed in Moscow, however, it was clear that even the oligarchs weren’t masters of much. Mikhail Khodorkovsky had successfully navigated the path from Leninist youth organizer to owner of massive oil fields, but when he suggested that there should be a healthy opposition party and that perhaps Vladimir Putin should have limited powers, he was imprisoned. The other oligarchs took notice and fell in line. 

As I watched American tech oligarchs line up behind Donald Trump at the inauguration in January, I thought, “I really wish these techno optimists had been less beguiled by the lure of infinity and more interested in how things went wrong elsewhere.” Once you get into the bribery business, it usually becomes more profitable to fight over slices of cake than to make bigger cakes. The American broligarchs each offered their bribes in hopes of receiving individual favors for their companies instead of advocating for better governance, better rules, better regulation. 

Climate change is getting worse, and we have a more desperate need for leadership and constraints to keep us from plowing into even the visible dangers ahead. But our leaders have no experience or imagination for bad outcomes. For a few years, it was popular for financial firms to talk enthusiastically about climate change because they had an optimistic story and could offer new “green” products to customers. But faced for the first time with the threat of political pressure and with the reality that climate change is a risk issue, not a win-win business opportunity, almost all of them have quickly retreated. 

I keep thinking back to an after-hours work event a few months before I left the investment business. A portfolio manager at the firm who was seen as more grounded, patient, and open than his colleagues came up to me. He had clearly had more than two drinks. He got quite close to me, made deep eye contact, and said, “I’m listening to what you’re saying about climate change, but it’s hard. If it’s true, then we are ruining the planet for our children.” I said that he had heard me correctly and that those were indeed the stakes. He then shook his head and said, “I’ve never had to make a truly difficult decision in my life.” I told him, “I know how you feel.”

Actuarial imagination

While finance developed ever more narrow definitions of risk, a different group of experts stayed focused on the word’s true meaning. These experts didn’t get rich from falling interest rates, and they have never been called “Masters of the Universe,” but they and their predecessors have been tasked over centuries with figuring out how likely bad outcomes were, what their impacts might be, and how organizations and societies could avoid them. These people are actuaries. 

In January of this year, The Institute and Faculty of Actuaries released an assessment of climate risk. In it, they not only assess risks but also assess the assessments offered by economists and financial modelers.

For climate change, although it will have a range of societal impacts, significant focus is typically given to economic consequences, seeking to answer the question: What would the impact of climate change be on GDP?

Unfortunately, many high-profile, public climate change risk assessments are significantly underestimating risk because they exclude many of the real-world impacts of climate change.

These risk assessments are precisely wrong, rather than being roughly right. The benign but flawed results may reinforce the narrative that these are slow-moving risks with limited impacts, rather than severe risks requiring immediate action.

Such an approach does not meet the requirements of the principles for risk management… [as it excludes] uncertain, high-severity events from models, rather than making best estimates and adopting the precautionary principle.

A prudent approach would be to take the highest estimate of economic loss and reduce it when evidence becomes available that it is overstated, rather than the other way round.

The estimate of economic loss that they consider a reasonable starting estimate is between 50% and 67% of global GDP. They put more emphasis, however, on outcomes that don’t fit into spreadsheets, including mass migration, mass mortality, mass extinction events, and political upheaval, all of which are excluded from economic and financial models of climate impacts. In surprisingly colorful language, the actuaries describe the models used in finance and economics as:

Analogous to carrying out a risk assessment of the impact of the Titanic hitting an iceberg but excluding from [the] model the possibility that the ship could sink, the shortage of lifeboats, and death from drowning or hypothermia.

I strongly recommend the report, not just for what it has to say about climate change. It’s a primer on how to be an effective risk thinker. And at the center of it is the importance of considering things that might happen, imagining their potential consequences, and making a plan. It’s not a spreadsheet or a financial product, it’s a process. 

Better models, better practices, and better plans

The main thing I learned in my nearly 20 years in the investment business is that everyone has a model of the world, including you, right now. Each of us takes in information about the world and translates it into a set of feelings, intuitions, and reasoning to inform our decisions. Some people may have more predictive models and other people have less predictive ones; some people have complex analytics and huge databases, while others have gut feelings. But having a better model is of limited value. What matters most is how you plan. I don’t think the 2008 Financial Crisis is a useful analogy for the kinds of damage that climate change will cause, but a particular investment story from 2008 illustrates what I mean. I wish it were about me, but it’s about a competitor.

Mohamed El-Arian was born in 1958 in New York City to Egyptian parents, and as a child lived in Egypt, Europe, New York, and England. His father was an international lawyer and diplomat, and El-Arian worked at the International Monetary Fund before going into the investment business in 1998. By that time, he had seen many ways things could go wrong. He joined Pacific Investment Management Company, more commonly known as PIMCO, and helped its clients avoid Argentina’s debt default in 2001. PIMCO distinguished itself in the 2008 financial crisis, and the word on the street and in the press was that PIMCO had better models, understood the world better, and could see what was coming. They predicted that Lehman Brothers was going to fail. El-Arian, the company’s CEO, and its CIO, Bill Gross, were geniuses. 

Except that’s not true. Here are El-Arian’s own words from a recent interview:

So on the weekend in which Lehman Brothers failed, we were sitting in the investment committee room, and we were trying to predict what was going to happen. The history books keep on saying that PIMCO predicted the disorderly failure of Lehman because most of PIMCO’s clients made money after the financial crisis… That is simply the wrong interpretation. We never predicted a financial crisis. Let me explain to you what happened. 

We had three scenarios on the board, and we had voted on the probabilities that we individually attach to each of those scenarios.

Scenario A, 85 percent probability. That’s the combined probability given that Lehman would not fail, that Lehman would be a repeat of Bear Stearns. A stronger bank would come in, take over the weak Lehman Brothers, and there would be no counterparty risk on Monday morning…

Scenario B, 12 percent probability, Lehman fails but fails in an orderly fashion. Why? Because no regulator would put the payments and settlement system in play. That is paralyzing to the real economy. That is destructive to livelihoods. Surely, if they allow Lehman to fail, it will fail in an orderly fashion.

3 percent was the probability we gave to Lehman failing in a disorderly fashion—the outcome. 

So the notion that we predicted Lehman was completely wrong.

But why is it that we were able to completely reposition ourselves? Because we had a very detailed action plan for each of these scenarios. We knew who would be doing what when. Simple things like delivering the notice of failure so that you can re-establish positions, to other things like informing clients and trying to change your portfolio postures before others work out their own action plan.

And I say this because when you face unusual uncertainty, it doesn’t mean you get paralyzed. Nor does it mean you stick to one outcome that may happen, but you ignore everything else. It means that you do the hard work of saying, here are possible scenarios, and let me try and figure out what I would do if these scenarios materialized. And let me keep open-minded and know what data I’m supposed to follow, rather than get stuck to a baseline that ends up to be wrong.

It’s a lot of work, yes. But the cost of that work pales in comparison to the cost of not being ready for an outcome that you did not plan for.

I felt pretty lousy when I heard El-Arian say this. I had been in a senior leadership position at a competitor of PIMCO’s. I had gone with colleagues to the US Federal Reserve to warn the Fed about the bad things that were likely to happen. In fact, I think my colleagues and I had a better estimate of the likelihood of a disruptive outcome, a better model. And yet I didn’t push for a plan. The firm did okay, but we could have done better for our clients. 

Some earnest people are trying to create better models to precisely predict how climate change will affect the economy and markets so that they can convince the markets to convince the public to convince politicians to steer us away from danger, much like how people in the past few months have waited for markets to tell us whether random tariffs that undermine international relations are going to raise or lower next year’s corporate earnings. I think this focus on models and market signals is mostly a waste of time and often counterproductive. Instead, we can think in scenarios and assess which outcomes we most want to avoid then figure out what work we can do to achieve that goal. What we must not do is trust the optimists.

Why I write

I began writing essays on the solstices and equinoxes more than five years ago. I didn’t try to publish in economics journals, the financial press, or in climate science outlets. I had high conviction that anyone could understand the basics of climate science and that the way forward was for everyone to start planning, not wait for the financial sector to show the way. The scope of political and professional uncertainty in the world has widened since my first essays, while the range of possible climate outcomes has shifted for the worse. We are at 1.5°C, we are likely to be at 2.0°C in a decade or so. Emissions in 2024 were higher than ever. And investors are distracted by a hailstorm of information that their models can barely process. 

Before I went onstage at the recent climate conference with the $200B climate price tag, I was chatting with a man who was going to be on the panel following my remarks. He had worked for corporations and governments around the world as an oil engineer and the manager of major infrastructure projects including railways and wind farms. He now oversees the construction of nuclear submarines for an OECD country. He knows a lot about risk and scenario planning. He asked me what I was going to say to this group of investors. I gave him the gist and showed him some Probable Futures maps on my phone. He was impressed, thanked me and my collaborators, and then smiled a wry smile, cocked his head toward the audience, and said, “Do you really think these people will listen? All this group cares about is maximizing the shit out of everything.” I replied that I was absolutely sure it was worth trying. And that their choice to invite both of us was perhaps a signal that the optimists were reconsidering.

Onward,

Spencer