VaR or Value at Risk is a must model for all financial institution. What VaR model suggests in terms of Dollar figure is that there is a certain confidence that the losses of a firm won’t exceed a certain dollar amount. Calculating VaR number requires complex statistical and mathematical models. And people calculating such numbers are called Quants – a venerable job at least until now! For example if VaR number calculated at 99% confidence interval of an ABC firm is $50 million then that means 99 out of 100 times the maximum losses that can occur will be less or equal to $50 Millions. But the folly lies when we look other way round. It means there is a 1% chance that losses will be at least $ 50 million i.e. from fifty million to infinity. This 1% probability usually brings catastrophe. Nassim Nicholas Taleb christened this seemingly innocuous but probability of catastrophic results as ‘Black Swan’. Unfortunately, the in-built risk management system of human mind doesn’t take this probability into account and hence people tend to get caught unaware. This concept is not just a mathematical probability applied in financial world alone. But we can see imprints of Black Swan in every facet of Human life and across the human history.
For example, no one I mean no one really expected WW II to happen. I know it sounds lunatic. Aftermath of any civilization changing event usually makes us believe that the contemporary generation didn’t do enough to stop the catastrophe. It is true to certain extent but more than that the contemporary generation actually failed to see that something needs to be done. That generation slept like a baby. London Bond Market right up to the Poland invasion was working smoothly. There was no anxiety about getting investment back. And there was no apparent uncertainty in bond pricing about the possibility of a neighborhood country orchestrating war. The war did happen and more than the sheer magnitude, it’s the absolutely surprise that stunned the whole world. And total incompetency in handling the situation cost 60 million lives.
Now let’s try to see India-Pakistan relations through this prism.
It is often mentioned that Security issues is not foremost on Indian voters mind. If that’s the reality then it’s very sad. Considering we are surrounded by countries that don’t necessarily like us we need to be vigilant about our security. We are getting attacked repeatedly by Pakistan and yet we refuse to act against them. We don’t attack them; we don’t put economic sanctions against them. In fact officially they are not even on our Enemy List. (For Pete’s sake we are a peace loving nation!) We play cricket with those bastards and we allow their hopeless singers to make money in India. Any sane mind will think that if Pakistan doesn’t want peace then we will give them war. But sanity is in shortage in India.
The so called intellectual class in India believes that in case of war, losses that Pakistan will be negligible because being a failed state Pakistan don’t have anything anyways. On the other hand the losses India will incur will be huge. That means we need to think hard before going strong. Apart from that, Indians tend to believe that Indian army is too strong for Pakistani army. And Pakistan can never defeat India in conventional warfare In short there is a remote possibility of war and if any then India can kick Pakistani ass anytime. That’s what brings us to the possibility of Black Swan moment. The probability of Black Swan is very low but nevertheless it’s still a possibility. And whenever those events take place, and trust me they do, the results are catastrophic, earth-shattering and history changing. Why do I think the possibility of us getting humbled? Because the conventional warfare is so yesterday! Who wants to talk about conventional war when two of the great empires were humbled by rag-tag armies of Afghan Mujahidin’s and Viet-Congs! The war has changed its face but we haven’t changed our thinking and that can get us into the trouble. Because we believe we don’t need to do anything special and our future generation will curse us for not doing something that was required.
Pakistan is a sworn enemy of India. Irrespective of what Indians or Indian leadership think about Pakistan, in actuality Pakistan’s sole aim is to destroy India. They have tried repeatedly to wage war and when that failed they started creating unrest in India in every way or shape or form. Unfortunately, the usual response from India is nothing short of criminal. It is as if Indians take their freedom too lightly. It is flabbergasting to see Indians forgetting that they were enslaved and ruled by foreign invaders for all most one thousand years. And the freedom we are enjoying and the progress we are achieving is just 60 years old. We are peace-loving nation. Agreed! But peace is a two way street and if other party is hell bent on waging a war or in this case already in war with you then the choices are extremely limited. Either you defend yourself or get obliterated.
It always amuses that the strong Persian and Indian empires crumbled like pack of cards in front of Islamic onslaught. Looking at the history more closely we can see that Hindu kingdoms fought actively and valiantly against Islamic marauders for more than two hundred years. Their mistake was that they fought with invaders as if they are fighting their neighborhood Hindu kingdoms. They failed to see the difference. They didn’t realize that the Islamic invaders are not only hell bent on destroying everything on their way but these invaders, drunk on religious fervor, won’t stop until they destroy the very basic fabric of our society. That’s why Indian kingdom didn’t unite. Worse, they used to let go defeated Islamic invaders with gifts instead of out rightly killing them.
We capture terrorists and then let them go. We capture terrorist and don’t hang them. We don’t think that Pakistan is attacking our way of life and our freedom. We strictly see Pakistan from nation-state angle while they see us strictly through religious perspective.
The uncanny similarities between history and present are too scary to ignore. But we can find solace in the fact that the results will be same! I personally don’t believe there is Black Swan moment waiting to happen. I believe that there is in fact a 900 pound Gorilla sitting in the room ready to pound on us while we sleep like babies.
But then dream land is always more soothing than the reality!
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