What is a black swan event?

Make PDF

About “black swan” event-

• A black swan is a rare, unpredictable event that comes as a surprise and has a significant impact on society or the world. 
• It can cause catastrophic damage to an economy by negatively impacting markets and investments, but even the use of robust modeling cannot prevent a black swan event.
• These events are said to have three distinguishing characteristics – 
  • they are extremely rare and outside the realm of regular expectations; 
  • they have a severe impact after they hit; and 
  • they seem probable in hindsight when plausible explanations appear.
• The black swan theory was put forward by author and investor Nassim Nicholas Taleb in 2001, and later popularised in his 2007 book – The Black Swan: The Impact of the Highly Improbable. 
• In his book, Taleb does not try to lay out a method to predict such events, but instead stresses on building “robustness” in systems and strategies to deal with such occurrences and withstand their impact.
• Europeans believed all swans to be white until 1697, when a Dutch explorer spotted the first black swan in Australia and the metaphor ‘black swan event’ is derived from this unprecedented spotting and how it upended the West’s understanding of swans.
• Interestingly, Taleb’s book predated the 2008 global financial crisis – a black swan event triggered by a sudden crash in the booming housing market in the US. 
• The fall of the Soviet Union, the terrorist attack in the US on September 11, 2001, also fall in the same category.

The Covid-19 pandemic and black swan event-

• In an interview to Bloomberg in 2020, Taleb called COVID pandemic a “white swan”, arguing that it was predictable.
• While the outbreak of any pandemic is difficult to individually predict, the possibility of one occurring and having a major impact on systems around the world was known and documented.

Make PDF