Black Swan Event

What is a Black Swan Event?

Black Swam event is metaphor used for the events, transaction or specific activity that happens which cannot be predicted nor even expected to happen. Such events are highly rare, it has a huge impact on the economy, society, politics, etc and its coverage remains widespread and therefore, needs to be handle with great caution. The term was coined by Nassim Nicholas Taleb, who has also written a well-known book on this topic.

Features of Black Swan Event

  • Such events are highly rare. They have severe repercussions. These events cannot be predicted well in advance. One can imagine such events in fiction, but in reality, how it can happen or how the same will take place that cannot be imagined by anyone.
  • These events are considered as catastrophic events that have a high level of impact on the global economy. Such events needed to be handled with great caution, and the same requires highly potential skills to tackle the same with great care.
  • All the science, logic, astrology fail in predicting such events. Loss of such events can be a known post happening of the same, and it will require a massive stimulus from the government of specific countries to handle the same.
  • Such events show that despite becoming so much advanced in science, technology, the highest level of research, etc., no one can imagine the occurrence of such events. In the past, many such events have occurred and have proved the above fact.
  • All the strategic planners and thinkers do plan or predict the occurrence of such events; however, they get mistaken with the scale of its occurrence. Every time, the scale is so massive, that it creates havoc in society.
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Examples of Black Swan Event

The following are some examples:

Example #1

In the USA, the year 2008 is remembered by all citizens as this year is considered a dark chapter in their history, and the stock market crashStock Market CrashA stock market crash occurs when stock prices in all sectors begin to fall rapidly. It is often the result of global factors such as war, scam, or the collapse of a certain industry. In such a crash, panic acts as a catalyst.read more took place. The whole Wall Street was in a blood bath, and in these events, one of the largest investment banks of the USA: Lehman Bros, filed for chapter 11 bankruptcy.

No one can even imagine that one of the most prestigious financial institutesFinancial InstitutesFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more of the nation with such a golden history in the US economy will have to go for this step. It resulted in a catastrophic situation in the US stock exchange; the effect of this catastrophe was huge, and it affected almost all the stock exchange of the world. The vast amount of dollars wiped out of the market.

Example #2

Inflation is one of the significant indicators of the economic healthIndicators Of The Economic HealthSome economic indicators are GDP, Exchange Rate Stability, Risk Premiums, Crude Oil Prices etc. read more of any nation. One will expect the price of bread can be doubled or tripled during high inflation situation. However, in 2008, in Zimbabwe, hyperinflationHyperinflationHyperinflation is an accelerated level of inflation that tends to quickly destroy the actual value of the local currency since there is a rise in the cost of all products and services. It forces people to lower their holdings in that particular currency to participate in stable foreign currencies.read more reached such a high level that the price of bread increased by seventy-nine billion times of normal price. It’s not possible to predict such a kind of havoc.

Attributes of a Black Swan Event

  1. Black Swan event is always having a surprise factor in it.
  2. It always comes with surprise and gives a massive blow to all. It will create havoc like situation in the economy.
  3. After its occurrence, one will think that such a high level of destruction will not be possible in the future, but next time it came with more power and created a huge impact. Example of World war 1 and world war 2.
  4. All kinds of mitigation ideas will get failed in solving such a catastrophe, and no one will be able to handle the same.

Why Is It Called a Black Swan Event?

  • Except for Australia, in the rest of the world, the swan is always getting imagined and seen as white. People had never imagined that Swan can be of a different color. Post discovery of Australia, people got to know that swan can be of black color as well. It was not possible to believe by them as the same was a kind of surprise and unimaginable discovery for them.
  • It develops a new theory that in this world, everything is not happening as per one’s expectation or one’s imagination. One will always identify new things and new events around them that will have a significant impact on them and scan their surroundings and their planning.
  • Taleb, a person who coined the term Black Swan events, states that there are possibilities that few events that are full of surprises for one person may not be as surprising for others. Everything will be dependent on their surroundings and expectations that will determine the nature of surprise in any event.

Benefits

  • One will get to know that there is a need to broaden their horizons: Such an event can shake out one’s belief. One will get to know that they will have to do their research again and need to broaden their horizon as such events are beyond their imagination.
  • Controls Needed Can Be Identified: The impact of such events highly depends on luck. One will be able to determine the controls that need to be placed. It will also help in ensuring the business continuity process inline.
  • Importance of Forecasting and Planning can be Known: Due to the occurrence of such events, one will be able to know the importance of forecasting or planning in the parlance of national and business activity. One will be able to know how efficient their forecasting or planning is there actually and what changes are needed in the same.

Disadvantages

  • The Entire Theory is Probabilistic Decision Theory: Black swan, even theory is highly dependent on the probability. One can say whether it can occur or not. Such an event may or may not even in actual take place.
  • Nobody Knows What’s Going On: In the local, national, or global market or economy, one cannot surely tell that what’s going on. One cannot ensure or predict that based on the present situation, future specific activities will take place in this particular order or in a particular pattern.

Conclusion

Black swan events are highly unpredictable, full of surprises, bring new things along with it. One cannot master it, and one cannot firmly say that such an event can be a black swan event or not. It will always be dependent on the observer’s perception of how much he can recognize and how much it proves to be surprised to them. However, the only odd thing is that it is a probability that it may or may not occur.

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