Markets are just as clueless after conflicts happen
Save time by listening to our audio articles as you multitaskThat lurid story, published in an anti-Semitic pamphlet long after the battle, has little truth to it. Rothschild was not at Waterloo. No one knows if he made money in the aftermath, and certainly not what would have been an unthinkably large sum at the time. But the legend is also wrong in general. Rather than profiteering, most investors lose money during wars, because they fail to see them coming.
This lack of foresight fits a historical pattern. Markets stayed placid through the years of border spats and bellicose rhetoric that led to the first world war. European stocks still did not budge when Austrian Archduke Franz Ferdinand was assassinated in June 1914. It is only when conflict seemed inevitable—days before Austria-Hungary declared war on Serbia, in July—that panic took hold.
One problem faced by investors is that they are poorly equipped to assess risks associated with “black-swan” events, which have very low probabilities but which can be extremely costly. Most common market-moving events change the outlook for returns far more incrementally. Take American payroll data: since 1948, moves of even 0.4 percentage points in the monthly unemployment rate have occurred less than 10% of the time.
Wars are not the only black swans. But others tend to be more localised and temporary , more familiar to investors or easier to forecast . The decision to declare war depends on the thought process of individual leaders . Regrettably, the track record of the many sciences trying to predict their next move is poor.
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