Risk tolerance: Why decadent Europe is whistling as chaos reaches its gates
WILL the US ramp up its involvement in Iraq? And if so, on what terms? Will Europe build on its new partnership agreements with Ukraine, Moldova, and Georgia to draw an effective line over which an expansive Russia would not dare cross? Will Israel persist in rattling its sabre, while Western powers search for a deal with Iran over its nuclear programme? If investors want to predict the future evolution of these geopolitical questions, they would do worse than to understand human psychology.
As the Beatles so aptly put it, tomorrow never knows. One of the central elements of a human personality is the ability to tolerate the unknown. All humans desperately need to feel in control. Safety, as the psychologist Abraham Maslow said, is only slightly less important than sleeping and eating; people can think or do little else until they feel safe.
To feel safe means being reasonably able to predict the future. Relative tolerance of uncertainty (and its immediate implication, risk) determines how open one will be to trying new things, trusting others, or compromising. Crucially, nations – composed of human beings – naturally reflect this trait. More than anything else, a nation’s specific risk tolerance explains its overall foreign policy orientation, serving as the vital bridge between ideology and action, as they translate a country’s feelings about the world into practical analysis.
Israel – a country just 15km wide at its narrowest – unsurprisingly has a very low tolerance for risk, as a foreign policy mistake of almost any magnitude could well be the country’s last. Added to this unchangeable geographic reality is the fact that, in the words of the novelist Joseph Heller, just because you are paranoid does not mean people are not after you. Surrounded by enemies on all sides, it is little wonder that Israel tends to run an aggressive, proactive foreign policy, years back knocking out the Syrian nuclear programme before it could be operationalised, and now keeping a very leery eye on Iran’s burgeoning nuclear capabilities. Given Tel Aviv’s understandably low tolerance for risk, shooting first and asking questions later makes eminent sense.
For America, the opposite holds true. Geographically, the country is best thought of as a castle, with the dual moat system of the Atlantic and Pacific Oceans. Blessed with this impossibly secure position, the mainland of the US was last seriously threatened by a foreign army during the War of 1812. Geography explains Washington’s easygoing feelings about risk throughout the twentieth century.
Slow to analyse significant dangers, slow to be involved in both world wars, the US has historically flirted dangerously with isolationism. Its wondrous strategic position has allowed the country to dream the impossible dream that the rest of the world simply does not matter. Here, an understandable lack of urgency about risk can become an intellectual narcotic. However, America has (often at the last minute) managed to awaken to the overriding strategic peril that no one country must be allowed to dominate either Europe or Asia, and – using the cushion its geographic position allows – act accordingly.
If America has on the whole been too slow to act based on its relaxed attitude to risk, at least this view is solidly based on geographical realities. Modern day Europe has no such excuses; its holiday from history can instead be seen as a form of shared psychosis, of confusing wanting the world to be a certain way with calmly assessing the world as it actually is. Europe possesses a high tolerance for risk that simply does not fit the geopolitical facts.
Surrounded by an aggressive, cornered Russia, and a North Africa and Greater Middle East in absolute chaos, why do Europe’s leaders continue to whistle past the graveyard, seeming to have not a care in the world? The continent’s growing love affair with decadence (best described as giving up all hope of actually solving its problems, in favour of a weary intellectual acceptance that nothing can be done) explains much.
If Russia really is as scary as it seems, and the Middle East truly is as chaotic, European nations would have to spend a whole lot more on defence, developing a more strategic approach to relations with their unpredictable neighbours. To an exhausted Europe, this is simply a bridge too far. Far easier to hum a happy tune, pretending there are not sea monsters out there, and have that extra cup of coffee. Europe’s overly high risk tolerance lies at the heart of what ails it.
In all these many cases for investors, if you want to know how to predict what someone will do, you need to know their ability to tolerate risk. To predict what nations will do, you need to know the same thing.
Dr John C Hulsman is senior columnist at City A.M., and president and co-founder of John C Hulsman Enterprises (www.john-hulsman.com), a global political risk consultancy. He is a life member of the Council on Foreign Relations and author most recently of Lawrence Arabia, To Begin the World Over Again. Lara Palay, MSW, is a psychotherapist who consults on clinical issues and social welfare policy. She lectures on clinical social work at Ohio State University, and is a managing partner at the Aldridge Palay Group.