Depression, hyperinflation and excessive leverage represent the top three risks facing investors, according to new research released by Watson Wyatt.
The research, contained in a new paper titled Extreme Risks, claimed these elements are regarded as being in the top three based on their potential impact and the likelihood they will occur.
Commenting on the paper, Watson Wyatt head of strategy research in Australia Tim Unger said events in the past two years had demonstrated that risk management could not afford to stop at the so-called 95th percentile.
“We need to find ways of factoring in very unlikely but high impact events,” he said. “Being aware of risk in the extremes before they happen can protect value if built into a plan of action that can be implemented as soon as the need arises.”
The paper suggested that a robust defence could be built by combining qualitative understanding, quantitative modelling and a cost-benefit analysis of possible strategies.
“By considering the possible impact of these risks in advance, rescue plans can be formulated so that they are ready to implement.”
