This post was mentioned on Twitter by MercatusBlogs: Overcoming Bias: Downturns Are Not Existential Risks: Epidemics, wars, and quakes are distributed with long tail.. http://bit.ly/1Dzxm...

However, plenty of natural disasters (and human wars) have mortality alphas between 1 and 2, the domain where the average is undefined and very big disasters are fairly common. There the important question is whether there exist cut-offs (likely for landslides and flooding due to geography, but not guaranteed for epidemics or wars).

Together, this seems to suggest that while endogenous downturns and crashes occur, they are relatively unlikely to crash the market completely. But it might be exogenous disturbances that we should watch out for, both in terms of mortality and in their market impact.

Still, the 1918 flu did not seem to have had a very noticeable economic effect – if extremes like that doesn’t show up in the data, maybe the economy is much more resilient than we normally tend to think?

Alternately, the government may sense public outrage and try to distract it with a war. Since a war, to be useful, would have to be mobilize society, there’s a danger of losing it. Alternately, the war may be won, building confidence for a later truly stupid war.

For example, a country might create a new taxation scheme that is revenue-negative, or go to war, or radically change its regulatory structure, or target a minority for persecution as the downturn’s ’cause’, or ignore infrastuctural improvements needed to prevent other disasters.