Episode Details

Whilet businesses and investors are continuously exposed to many risks, there is a sub-category of risks that are rare, but if they do occur, can have devastating consequences. This session looks at those catastrophic risks, breaking them down first on source (nature, man-made, regulatory/legal), locus of damage (one business, a few businesses, an entire sector, the entire economy) and then looking at how to incorporate those risks into business value. While their effects can show up in every input into valuation, I present a flowchart for deciding the right place to show catastrophic risks, based upon whether they are insurable or not, and whether they affect a few firms, the sector or the market. I close the session at how markets price these risks, arguing that they swing between denial (when the risks are distant) to panic (when they are imminent).
Slides: https://pages.stern.nyu.edu/~adamodar/pdfiles/blog/CatRisk.pdf
Blog Post: https://aswathdamodaran.blogspot.com/2024/02/catastrophic-risk-investing-and.html

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