How to hedge life

Odds are the next disaster will be something we haven’t taken seriously, or even imagined. We exit the pandemic in a more precarious place because we have much less insurance for such an event. Insurance comes from the ability to spend, and issue debt, when the next costly risk is realized. Overspending today can mean that we have less space to spend in the future—and trying to pay for a natural disaster, another pandemic, or a deep recession will result in spiking interest rates or a falling dollar. Reckless spending in good times is akin to forgoing payment of insurance premiums when you’re healthy and young.

Financial economics got a bad reputation during the financial crisis for creating more risk instead of reducing it. But that view largely reflected a failure of the industry to adhere to the very principles that we all should be using. The beauty of good financial risk models is consistency and transparency. They force decision-makers to be accountable, use logic, and access the best data available. And the principles are useful in any risk problem, from everyday risks that are well-defined, like Lindblad issuing a bail bond, to tail risks that are hard to predict, like environmental disaster.

True, financial models sometimes fail or are used incorrectly. But what is the alternative? We saw it during the pandemic: chaos, distrust, and superstition guiding policy and decision-making.