Market anticipations of conflict onsets

Does the recurrence of wars suggest that we fail to recognize dangerous situations for what they are, and are doomed to repeat the errors of the past? Or rather that policymakers correctly anticipate the consequences of their actions but knowingly choose conflict? Unfortunately, little is known about how well wars are anticipated. Do conflicts tend to come as a surprise? I estimated the risk of war as perceived by contemporaries of all interstate and intrastate conflicts between 1816 and 2007. Using historical financial data of government bond yields, I find that market participants tend to underestimate the risk of war prior to its onset, and to react with surprise immediately thereafter. This result illustrates how conflict forecasts can be self-fulfilling or self-defeating. Present predictions may affect future behavior, such that wars may be less likely to occur when they are predicted, but more likely when they are not. I also show that the forecasting record has not improved over the past 200 years, and that wars involving democracies lead to greater market shocks. These findings also have implications for the way decisionmakers respond to new information, and how audiences perceive the risk of war and hence their leaders’ actions.