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Chernobyling Our Finances

Chernobyling Our Finances

The Chernobyl accident is considered the most disastrous nuclear power plant accident in history, both in terms of cost and casualties.”

How could this happen?

We hear the question repeated throughout HBO’s miniseries, Chernobyl.

A combination of systems and checklists overseen by nuclear physicists, theoretically, should have been foolproof. In fact, for most of the show, the scientists remain adamant that the plant’s core could not have exploded, despite clear evidence of the contrary. The explosion just didn’t seem within their realm of possibility.

And yet, a combination of system and user error reportedly caused the explosion and one of the greatest catastrophes in human history. The scientists’ delay in asking, what if we are wrong and the core actually exploded, cost them valuable time for the recovery process.

Long Term Capital Management (LTCM) collapsed in 1998. The board of the prestigious hedge fund boasted two Nobel Prize winners and the former head of bond trading for Solomon Brothers – at the time, a prominent trading desk. The fund operated advanced models that made money exploiting complex inefficiencies in the various investment markets. Essentially, foolproof.

After three years of wild success, the fund went bankrupt.

How could this happen?

In 1998, Russia defaulted on their bonds. At the time, nobody thought that a sovereign government, capable of printing their own money, could possibly default on their bond obligations. The fund’s model did not account for a default within its realm of possibility.

And yet, a Russian default happened, and Long Term Capital Management saw themselves on the wrong side of multiple trades. Their inability to ask themselves, what if the models are wrong, cost them to the point of bankruptcy.

Why do I share the stories of these two spectacular catastrophes?

To show that even teams of the most brilliant minds make mistakes. And for many of us and our finances, it will likely be no different. Financial mistakes will happen. It’s humbling, yet powerful to accept the inevitability. One of the best ways we can mitigate the damage is by asking ourselves, what if I’m wrong?

A few examples of common, strongly held beliefs that devastate if wrong:

  • “The stock market is going to crash.”
  • “I won’t live into my 90’s”
  • “I’ll get to the estate plan later”

For each of these statements, I prompt the question, “what if you’re wrong”?

It may not be possible nor practical to plan around every scenario, but I’d encourage you to address the outcomes that may have the largest impact on you or those you care about. Humbling ourselves through the financial planning process provides peace of mind should something we never thought possible actually occur.

Not sure where to start? Get in touch. I’d love to help.

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