Source: Thomson Financial
Thomson Financial, an operating unit of The Thomson Corporation (NYSE: TOC; TSX: TOC) and leading provider of information and technology solutions to the worldwide financial community, announced today that it has launched its first sector-based risk indicator for the general financial sector, and that it is partnering with the World Economic Forum to develop predictive markets contracts on the probability and potential impact of non-financial risks on a global scale.
Key findings of the Thomson Financial risk indicator for the general financial sector:Financial risks are the most significant for the sector, comprising just over two-thirdsGeopolitical risk in the Middle East accounts for a relatively significant portion of risk at just under one-thirdTerrorism has a statistically insignificant impact on the sectorThe risk from a bird flu pandemic is clearly an issue, but the specific impact of an outbreak remains to be quantified
The Thomson model for the general financials sector, which includes investment banks and investment management companies but not insurance companies, breaks down risk to the sector into its key component parts. The model then aggregates these risks to provide a balanced view of risk across the sector, highlighting movements in the overall risk profile to the sector.
Currently, the information that governments, corporate executives, investors and the financial community receive on potential non-financial risks can be sensational in nature and may emanate from a tiny pool of experts, which often means that the prevailing view can be biased. Research shows that market-based predictions generally outperform pundits and polls, as markets excel in aggregating all available information generating a more objective consensus about the future.
In order to assess the probability and potential impact of an avian flu pandemic, Thomson has partnered with the World Economic Forum to develop predictive market contracts to provide a key data input into the sector risk model. The aim is to encourage as many participants as possible to participate in these markets.
In order to assess the potential impact of bird flu on financial markets, a market has been created to allow participants to predict the impact on the Dow Jones Industrial Average based on a number of scenarios in relation to the spread of the bird flu vead of the bird flu virus. This will be assessed against the contract which preddicts the number of countries to report a human case of avian flu in 2007.
Predictive markets are virtual-money markets, updated in real-time, where participants invest by only risking their reputations. The book closes at the end of each year - and current league tables are viewable on the site, alongside the current value of the contracts.
Reviewing the risk of bird flu, in November 2004 the World Health Organization (WHO) issued a warning that "bird flu will trigger an international pandemic that could kill up to seven million people. The influenza pandemic could occur anywhere from next week to the coming years." Taken at face value from a financial services perspective, companies should probably be actively moving their offices and staff to remote locations and investing heavily in new communications technology to reduce the amount of travelling. However, such decisions are clearly not going to be made without more data. The WHO clearly needs to highlight what could potentially occur, whereas corporate executives need to deal with probabilities and not possibilities. Predictive markets can be harnessed to bring together all of the information that exists, thus providing a more balanced and accurate view of the real risks.
Jesse Fahnestock, Global Leadership Fellow, The World Economic Forum commented: "Most global risks are difficult or impossible to assess quantitatively, but in today's competitive and interconnected business environment, understanding these risks is increasingly important. Predictive markets aggregate collective wisdom, helping to overcome perceptual and cognitive biases, and could be an excellent tool for investors and other decision makers struggling to understand the potential impact of risks such as avian influenza."
Thomas Aubrey, Investment Management Director, Thomson Financial added: "The key to successful risk management is to focus on those risks that truly matter and ensure that the impact of these risks is understood and mitigated. Thomson Financial's risk indicators help provide corporate executives with a balanced approach to understanding the new risk paradigm - highlighting those risks, be they financial or non-financial, which are really relevant."