Abstract
This chapter discusses the unknown future. With uncertainty, something good or bad may happen. In investment, one is often concerned with the likelihood of the latter. Then there are complicating unknown unknowns. The investments return known only ex post sums it up as for a roulette ball that has reached standstill. Economic slumps represent risk. Everyone may have been too optimistic regarding the future. Asset prices could fall sharply, particularly for stocks and fixed real assets. For SWFs, slumps may be the most important risk. Another important factor is political stability. The world became safer for investment around 1990. Still, geopolitics represents a risk that has excluded some areas from receiving investments. However, for most investors more mundane, traditional risks dominate. A further uncertainty is demographics. Resource wealth is diluted by immigration. Traditional Norwegians have few children, late in life. Newcomers have higher birth rates and are not integrated in the labor market. Higher immigrant employment rates and more successful integration seems needed for long-term success and sustainability.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
A lottery ticket has a large, expected negative return expressed as a percentage of the purchase price. For instance, in state lotteries in Norway the expected return is about – 50 pct. The tickets can be sold precisely because the return exhibits a vast variability. Some may want to pay more than the expected value for a very slim chance to win a big prize. This behavior can be sustainable only if trivial amounts are spent, e.g. sums that could not else have made a difference. However, players over time could have benefited from saving larger amounts to invest at higher returns, which would require discipline.
- 2.
This is based on the preface to a 2012 Courier Corporation reprint published in Mineola, NY.
- 3.
According to M. A. H. Dempster (2011), the pioneers of Gaussian Finance are Louis Bachelier, Maurice George Kendall, Harry Markowitz, and Paul Samuelson.
- 4.
Hubbard, ibid., exemplifies as follows for a nuclear power plant: “If valve X fails, it causes a loss of back pressure on pump Y, causing a drop in [the] flow to vessel Z, and so on.”
- 5.
This paragraph draws on the item “Factor investing”, at en.m.wikipedia.org, accessed 4 September 2020.
- 6.
An intermediate example is the Fama and French (1993) three-factor model to describe stock returns, which extends the Capital Asset Pricing Model (CAPM). In addition to market risk, it includes as factors small cap stocks and stocks of high price to book value. The tendency of small cap stocks to outperform the market was established by Banz (1981). The roots of value investing go back to Graham et al. (1934). The three factors have reportedly been able to account for about 95 per cent of the return from investment portfolios. By including the factors in a benchmark portfolio, it could thus be possible to absorb a few tricks managers could use to beat a benchmark not based on the factors. The idea is based, however, on assumptions that small caps and high-quality stocks will continue to produce superior returns in the future.
- 7.
The U. S. dollar has appreciated vis-à-vis other key currencies over the same period, so the decline in terms of other key currencies are a bit smaller, though of a similar order of magnitude.
- 8.
Statement by staff member Erling Holmøy to Dagsnytt 18, NrK Radio, 25 January 2016.
- 9.
These figures have been reported to the WHO, according to CNN Health. Source: edition.cnn.com, accessed 1 January, 2021.
- 10.
The English philosopher Thomas Hobbes (1588-1679), in his 1651 book Leviathan, depicts a state of nature in which there is “no place for industry… no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear of violent death; and the life of man solitary, poor, nasty, brutish, and short”. Life is short and poor, and immediate survival concerns overshadows long-term needs. Hobbes thought this could be avoided only by a strong, undivided government. He propositioned a social contract, where ordinary men would accept subordination in relation to a strong sovereign in exchange for protection.
- 11.
The section is also motivated by mechanisms of corrupt exchanges as outlined in the corruption literature (e.g. La Porta and Vannucci, 1999, and to a very limited extent on experience by this author with Nano-scale real estate.
- 12.
See Le Goff (1986), cited by wikipedia.org, accessed 6 December 2019.
- 13.
This concept conspicuous consumption is due to the American economist Thorstein Veblen (1857-1929), and linked to his concept of a leisure class. The basic idea is that both available time and products purchased may be visible and serve as signals of social class, including for the purpose of attaining a higher social class. Veblen’s 1899 book The Theory of the Leisure Class: An Economic Study of Institutions, is a critique of conspicuous consumption as a function of a class-divided society and consumerism. Veblen’s concept may perhaps not be directly relevant for individuals in modern industrial societies. However, it may still be of use in thinking of other, similar phenomena.
- 14.
J. S. Mill (1848, quoted in Knack 2003) noted in relation to the industrialization of Europe in the 1800 s that “the largest obstacle was there were few on this continent that could be entrusted with large sums of money”, that is that personal integrity limited the possibilities for growth and industrialization. Personal integrity, however, is likely to depend on the institutions of a given society at a given point in time.
- 15.
To this author’s experience it seems to remain a strong norm that mainly original inhabitants of an area may be allowed to run profitable businesses in that area. Even if this attitude were to be relaxed with increased exposure to ‘aliens’, as is increasingly likely, it may not fully vane any time soon. At the very least, this could take a long time.
- 16.
Due to the high importance of location for real estate investments, this type of uncertainty could be more relevant for this asset class than some others – notably listed stocks and bond of large turnover that are listed by an exchange. Particularly drains on returns that could arise in later interaction with other agents, including local authorities, could be hard to foresee, and underestimated at the stage when funds are allocated to a given real estate investment.
- 17.
One reason can be that the behavior for instance by local authorities, that give rise to the risk, could be illegal or illegitimate. This usually also implies that the behavior cannot be easily observed: It is typical to hide aggressive or dubious actions. In decision-making, risks linked to predatory behavior can therefore wrongly be assumed away.
- 18.
This follows from key treaties Norway has ratified both under the UN and the Council of Europe. For instance, discrimination based on nationality is ruled out per the European Convention on Human Rights, article 14.
- 19.
About one third said they came from Syria, and about as many from Afghanistan. Of the remainder, there were about 40 other nationalities and 350 who were considered stateless (daily Verdens Gang 27 January 2016 “10 ting du må vite om asylkaoset på Storskog” (“10 items you need to know about the asylum chaos at Storskog”).
- 20.
This is accordance with to the so-called Dublin Regulation, that requires applicants seeking international protection under the Geneva Convention and the EU Qualification Directive. The Dublin regulation and its enforcement has worked to shield Norway and other countries of North Europe, since many applicants arrive in Europe by crossing the Mediterranean Ocean.
- 21.
Per a statement by migration researcher Jørgen Carling to daily Verdens Gang 27 January 2016.
- 22.
The 1951 Refugee convention a UN multilateral treaty, defines who is a refugee and sets out the rights of individuals that are granted asylum and the responsibilities of nations that grant asylum.
- 23.
However, neither business interests widely defined nor industrialists are likely to approve of a work force made up of a lower percentage of the population: This is likely to lead to increased taxes, and thus less favorable business conditions. Further, the persons that represent business interests often support conservative political parties.
- 24.
However, those who could have been employed in such jobs - without an influx of migrants - may still have valid reasons to dislike immigration, as discussed above. Immigration is a social issue associated with wide disagreement and conflict across Western societies. It has also been reported to be important in the United Kingdom in relation to brexit. As elsewhere in Europe, there are signs of higher tolerance for asylum seekers among young people and individuals of high social status, and in the cities. The reason for this may, however, not be straightforward.
- 25.
Norwegians have fewer children than before on average, for mainly two reasons: First, more emphasis on education by women leads to children later in life than before, and second, people who get children tend to have one or two. Fewer parents than previously have three or more children.
- 26.
Norges Offentlige Utredninger (NOU) 1988: 21, p. 13.
- 27.
With 5.2 million inhabitants, and U.S. dollar 200.000 per capita, the per capita number at 5.3 million inhabitants would be about the same, U.S. dollars 196.300 – a 1.9 per cent reduction.
- 28.
Citizens and residents need to apply in advance to receive transfers that are set by the state of Alaska, and restricted by guidelines that apply to all U. S. states. See, e.g., Alsweilem and Rietveld, op. cit.
References
Banz, R. 1981. “The Relationship Between Return and Market Value of Common Stocks”. The Journal of Financial Economics 9: 3–18.
Dempster, M. 2011. “Book Review: Emanuel Derman, Models Behaving Badly. Why Confusing Illusions with Reality Can Lead to Disaster, on Wall Street and in Life”. Quantitative Finance 12 (4): 509–511.
Fama, E., and K. French. 1993. “Common Risk Factors in the Return on Stocks and Bonds”. Journal of Financial Economics 33 (1): 3–56.
Goff, L. 1986. The Birth of Purgatory. Goldhammer, Chicago, Il.: Translation by A University of Chicago Press.
Graham, B., D. Dodd, and S. Cottle. 1934. Security Analysis. NYC, NY: McGraw-Hill.
Hubbard, D. 2007. The Failure of Risk Management. NYC, NY: Wiley.
Knack, S. (ed.) 2003. Democracy, Governance and Growth. Ann Arbor: University of Michigan Press.
Knight, F. 1921. Risk, Uncertainty and Profit. Boston, MA.: Houghton Mifflin Company, no. xxxi in the Messrs. Hart, Schaffner & Marx’ series of prize essays on economics. (Reprinted in 2012 by the Courier Corporation, Dover Publications, Inc., Mineola, NY.)
Markowitz, H. 1952. “Portfolio Selection”. Journal of Finance 7: 77–91.
Mill, J. 1848. Principles of Political Economy. London: John W. Parker.
Mishkin, F. 2006. The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich. Princeton, NJ: Princeton University Press.
Olson, M. 2003. “Dictatorship, Democracy, and Development”. In Democracy, Governance & Growth, ed. S. Knack, 115–136. Ann Arbor, MI: The University of Michigan Press.
The Perspective Commission (Steigumutvalget). 1988. “Norsk Økonomi i Forandring. Perspektiver for Nasjonalformue og Økonomisk Politikk i 1990-årene.” Norges Offentlige Utredninger – NOU 1988: 21. Oslo: Ministry of Finance.
Veblen, T. 1899. The Theory of the Leisure Class: An Economic Study of Institutions. NYC, NY: Macmillan.
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2021 The Author(s), under exclusive license to Springer Nature Switzerland AG
About this chapter
Cite this chapter
Røste, O.B. (2021). Risks and Uncertainty. In: Norway’s Sovereign Wealth Fund. Natural Resource Management and Policy, vol 54. Springer, Cham. https://doi.org/10.1007/978-3-030-74107-5_6
Download citation
DOI: https://doi.org/10.1007/978-3-030-74107-5_6
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-030-74106-8
Online ISBN: 978-3-030-74107-5
eBook Packages: Economics and FinanceEconomics and Finance (R0)