Welcome to Money for the Rest of Us. This is a personal financial show on Money. How it works, how to invest it, and how to live without worrying about it.

I'm your host, David Stein, today's episode 377. It's titled, What If It's Different This Time?

In last week's podcast episode, and also in the most recent episode of Money for the Rest of Us Plus, I shared some statistics,

how six months after a major military campaign, or terrorist event, the stock market, on average, has rebounded.

The economy has rebounded, and all prices have stabilized or fallen.

The head of global equity strategy at JP Morgan Chase, Ms. Lav Mateca, said something along the same lines.

If one is selling on the back of the latest geopolitical developments now, the risk is of getting whipsawed.

Historically, vast majority of military conflicts, especially if localized, did not tend to hurt investor confidence for too long, and would end up as buying opportunities.

Yet I am acutely aware, and have emphasized on the show that we are not guaranteed the average outcome.

We only get one life, one return stream, one pattern of annual stock market, and bond returns.

We get one series of geopolitical events. We pass through time.

We don't get to run a simulation of a bunch of different scenarios, and then choose one or take the average.

We get one shot.

And those averages, be it the average stock market return, the average return of different assets under different scenarios, those averages include extreme events, tail events, which are rare occurrences, well outside of the norm.

But if you have a scenario, we have a lot of extreme events, fat tails, that actually can skew the average.

Tail risk, which is distinct from tail events, tail events are things that occur, tail risk is the personal harm caused by these tail events.

In the worst case, tail risk can ruin us. We could die. We could go bankrupt. Our country could be invaded.

Tail events and tail risks are based on probabilities, statistics, where there is a defined range of potential outcomes, and the odds can be estimated.

Much of life can be defined or framed by probabilities. How likely is some event to occur?

Will our house burn down? What's our average life expectancy? That's different if something is uncertain.

When something is uncertain, we don't know what could happen, and we don't know the odds of what will happen. We just don't know the uncertainties are open-ended with many possibilities.

One easy way that it distinguishes between risks and uncertainties is risk you can buy insurance. I have recently reprised our home insurance and auto insurance.

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