Those attuned to political risk back in 1929 doubtless saved themselves a great deal of anguish, and in writing The Fat Tail, Bremmer and Keat seek to explain the importance of calculating political risk as a significant part of all investment calculations. Given the growing role of Washington, London, Beijing and other political capitals in the world economy, their book is well timed.

First up, it must be asked what the authors mean by a “Fat Tails”. They describe the latter as “unexpectedly thick ‘tails’” at the “ends of distribution curves”, and they “represent the risk that a particular event will occur that appears so catastrophically damaging, unlikely to happen, and difficult to predict, that many of us choose to simply ignore it.” That is, of course, “until it happens.”

As they make plain, a better understanding of the politics of Russia in the late ‘90s would have made a big difference for investors trying to divine whether or not the regime in place would default on its debt. Russia certainly had the revenue potential to honor its commitments, but a failure to understand the country’s politics left a lot of investors burned.

In this case, it’s important to understand that political success is not always achieved through economic success. Take for instance Mexico in the late 1930s. With policymakers in the United States and England occupied with economic troubles and a looming war, Mexican president Lazaro Cardenas felt the timing was right to make a political statement whereby he nationalized the country’s oil industry.

As the authors note, the nationalization “was a resounding political success”, but as they also point out, from an economic perspective Mexico lost big thanks to the departure of human and financial capital that had previously made this industry so vibrant. In this case, economic analysis would have pointed to the folly of nationalization, while astute political analysts might have reached different conclusions that would have saved investors a great deal of heartache. Political risk must always be accounted for, and differentiated from rational economics.