What is a black swan event?
In a world where we are constantly being told that “everything is possible” and “anything can happen,” a simple question arises: What makes a black swan? The black swan is a term used to describe a situation in which the expected outcome is completely at odds with previous historical trends. It could be a single event, or it could be a combination of multiple events. The point is that it is a situation that is new, interesting, and surprising.
The Concept Of Black Swan
Black swans are considered to be anomalies in nature, and since they are rare, rare events, they are also extremely difficult to predict. Black swans are a kind of super-reaction in which an event that was not predicted happens. In other words, a black swan event is just a random event, but because it is sporadic, it is so impossible to predict that it feels like something that has never been seen before.
This term was first introduced by Nassim Nicholas Taleb, who is a former Wall Street Trader and finance professor. He wrote about the concept of a “black swan event” in a book in 2007, which is a year before the 2008 economic crisis. In his book, Taleb insisted that the impossibility to predict black swan events should be enough reason for people to believe that they exist. Furthermore, utmost preparations should be made to respond to these events. Taleb noted that the rarity of these black swan events are among the factors as to why they can generate catastrophic effects.
In terms of financial adversities, many people said that it is important to diversify one’s assets to ensure a degree of protection. Once a black swan event does take place, diversification might cushion its impacts.
Taleb also made a notable hypothesis in relation to the black swan events and the 2008 financial crisis. He said that if a system is not immune to failure, then it can be receptive to the effects of black swan events. As a result, it gains immunity from it, similar to how our body responds to foreign invaders. For instance, experiencing a sudden economic recession is helpful in implementing preventive measures for it in the future. Oppositely, systems that are built to be impervious to these uncertainties are prone to catastrophes, especially when hit by unpredictable occurrences.
In a nutshell, Taleb offered several descriptions about the black swan. He said that:
- It is impossible to determine the root of black swan events because of their rarity.
- Black swan events have catastrophic consequences whenever they unfold.
- They can be explained comprehensively once they have come to pass.
Meanwhile, Taleb indicated that exceptionally rare black swan events are not measurable by the traditional tools of prediction and probability (i.e., normal distribution). After all, these tools depend on past sample sizes and large population groups. Of course, these components are not common elements found in rare events. Furthermore, it is also not useful to extrapolate black swan events using statistical methods. In fact, doing these calculations can make our systems more vulnerable to these happenings.
Another crucial aspect of a black swan event is its historical importance. Observers have to be alert and attentive so that they can explain why previous black swan events occurred. But at the same time, they should not make an assumption that these past instances should have been predicted. These are just speculations and do not help in predicting future catastrophes such as war or credit downfall.
Previous Black Swan Events
There are a number of black swan events that have been recorded. Here are some of them:
The landslide of the housing market in the United States throughout the 2008 financial crisis is a notable black swan event. It has a widespread impact, spreading throughout the globe. Only a number of individuals and institutions were able to see it from happening.
Another event also took place in Zimbabwe in 2008. During that year, the country experienced the worst case of hyperinflation. Specifically, the inflation rate rose to 79.6 billion percent. It ruined the country’s economic system. It made their money lost its value.
Of course, the dot-com bubble in 2001 should also be considered as a black swan event. Before it happened, the United States was still experiencing economic success. People had seen their wealth grow before the country’s economy collapsed in a blink of an eye.