Beyond economics: Factoring politics into investment strategies

Beyond economics: Factoring politics into investment strategies
Ian Bremmer discusses how businesses can limit risk exposure to political shocks.
The McKinsey Quarterly, May 2009
Ian Bremmer discussed the value of developing business strategies that help companies and investors limit their risk exposure to these shocks in his interview with McKinsey. He also shared political risk–management lessons from his new book, The Fat Tail: The Power of Political Knowledge for Strategic Investing, cowritten with colleague Preston Keat. Bremmer, the president and founder of political-risk consultancy Eurasia Group, spoke with McKinsey’s director of publishing, Rik Kirkland, in Eurasia Group’s New York office in March 2009.

Bremmer says that his book, The Fat Tail explains how politics is increasingly affecting the markets and creating a new set of winners and losers, short term, long term. It is very important for investors and business executives to know what is determining the likelihood of an exposure in a country, sector or an individual investment. The point of the book is that these shocks that many believe are not possible to be measured, that they’re impossible to predict and expect, they are increasingly about politics. They are about global political risk. And once you understand that, you realize that you can actually do a better job understanding them and a better job managing them.

Bremmer says that the structure of an organisation is very important in order for it to have an effective filter so it can use the information well. The information has to make its way though the decision process in the organisation. As a political scientist, Bremmer says that there is point when an executive can actually make a useful decision but to do that they need to be aware of what is going on.

Bremmer says, “A big part of The Fat Tail is actually not the management consulting part, because corporations have so gotten this wrong. They have so missed just paying attention to these variables that I think that we need to first get back to basics and say, “OK, what is political risk? What are the kinds of risks that are out there, from macro to micro, from social revolutions, geopolitical conflict, and terrorism to regulatory policies and nationalizations? And how do we identify them? And how do we understand where we might be facing them?”

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