From nationalization to terrorism, social revolutions to government regulations, sudden political changes can generate acute economic reverberations in markets and investments across the globe. In this video interview, Ian Bremmer discusses the value of developing business strategies that help companies and investors limit their risk exposure to these shocks. He also shares political risk–management lessons from his new book, The Fat Tail: The Power of Political Knowledge for Strategic Investing, cowritten with colleague Preston Keat. Bremmer, the president and founder of political-risk consultancy Eurasia Group, spoke with McKinsey’s director of publishing, Rik Kirkland, in Eurasia Group’s New York office in March 2009.

Watch the interview, or read the transcript below.

The Quarterly: What’s in this book for business readers? Why should they take a look at it?

Ian Bremmer: The Fat Tail really explains how politics increasingly is affecting the markets. And that’s creating a new set of winners and losers—short term, long term. If you are an investor, if you are a business executive in the most volatile and fast-moving world that we have had in the post-War period, you desperately need to know what is determining the likelihood of an exposure that you have to a country, to a sector, to a joint venture partner, to an individual investment. What’s the likelihood that that will stay in place and intact given a shock hitting it, given a change that you weren’t expecting?

You can count on changes that you weren’t expecting hitting your investments. You want to know how likely it is they’re going to stay in place. And I think that likelihood is increasingly going to be determined by political—and not economic—inputs. The Fat Tail focuses on those political inputs. I hope the business community gets a lot out of it.

The Quarterly: The name of the book: I assume this is a reference to statistics and not anatomy, but could you explain what is The Fat Tail? What’s the point?

Ian Bremmer: It’s certainly not a reference to anatomy. You know, the fat tail, simply put, are these 1-in-100-year storms that seem to be hitting us every 15 minutes nowadays in this global economic crisis. And we all know that the world has become more volatile. We know that shocks, fat-tail shocks—in other words, those that are larger than expected—come with greater frequency. But, the point of the book is that these shocks that many believe are not possible to be measured, that they’re impossible to predict and expect, they are increasingly about politics. They are about global political risk. And once you understand that, you realize that you can actually do a better job understanding them and a better job managing them.

The Quarterly: What does an executive do if he buys the idea that we’re moving into a period of greater volatility, where the political risks should be more on his or her radar than ever before?

Ian Bremmer: Well, I think there are a bunch of things an executive should do. The first thing an executive should do is recognize that those 10- and 20-year scenarios that they were spending a lot of time working on can be thrown out the window, because it is increasingly impossible to project those kinds of distances into the future. They need to spend an enormous time focusing on scenarios for 12, 18, 24 months, but they need to recognize that the breadth of potential outcomes is much greater than it used to be. So these fat tails, the size of these fat tails, has grown. The order of magnitude of the impact they can have has grown.

We’re in the middle of a global economic crisis right now. And there will be serious social discontent in developing markets all around the world. But they don’t typically hit at the same time as an economic crisis. They’re lagging indicators. They take 12, 18 months to really play through individual economies, after the economy starts to seriously slow. So, if you’re an executive right now and you have exposures in countries like Turkey, Ukraine, Thailand, Argentina, even Russia, you need to recognize that, in the short- to medium-term, the range of possible outcomes in those countries is far greater than it used to be.

And we need to recognize that in some countries there’s greater resilience, some less. Some institutions allow for greater efficiency, some less. In this environment, with politics trumping economics, you better know that. That’s something that effective decision makers can actually learn, they can apply, they can manage.

The Quarterly: How do businesses eliminate, minimize, avoid—which is the terminology you use in your book—how do they approach these kinds of issues around risk?

Ian Bremmer: First of all, in this sort of environment, diversification can really help you. I mean, there are a lot of companies out there that take [the approach], “We’re going to be in China and only in China. We’ll take one really big bet.” But there’s an enormous fat tail around both Chinese growth long term and also, more importantly, around whether or not Western corporations are able to take advantage of Chinese growth.

There’s also the question of corporate structure. Structure of organizations matters a lot to be able to have an effective filter, to use this information usefully, and to have it actually then work its way through actual decision processes in the organization. But still, as a political scientist, the funny thing is—I’m not a management consultant—but well before you get to the point that you can actually make a more useful decision, you need to actually understand what’s going on. And a big part of The Fat Tail is actually not the management consulting part, because corporations have so gotten this wrong. They have so missed just paying attention to these variables that I think that we need to first get back to basics and say, “OK, what is political risk? What are the kinds of risks that are out there, from macro to micro, from social revolutions, geopolitical conflict, and terrorism to regulatory policies and nationalizations? And how do we identify them? And how do we understand where we might be facing them?”