Black Swan Event

In News

• A study by the Reserve Bank of India (RBI) talked about the possibility of capital outflows of $100 billion from India in case of a major global risk scenario or a “black swan” event.

What is a “black swan” Event?

Unpredictable event: 

• A black swan is a rare, unpredictable event that comes as a surprise and has a significant impact on society or the world. 

Characteristics: 

• They 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.

Origination of the term:

• The black swan theory was put forward by author and investor Nassim Nicholas Taleb in 2001.
• Name of the book: It was later popularised in his 2007 book – The Black Swan: The Impact of the Highly Improbable.

Naming “black swan”:

• Europeans believed all swans to be white until 1697, when a Dutch explorer spotted the first black swan in Australia. 
• The metaphor ‘black swan event’ is derived from this unprecedented spotting from the 17th century, and how it upended the West’s understanding of swans. 
• The lesson is that what we think are very rare events may be more common than previously thought.

Examples of Past Black Swan Events

• The crash of the U.S. housing market during the 2008 financial crisis is one of the most recent and well-known black swan events.
• Also in 2008, Zimbabwe had the worst case of hyperinflation in the 21st century with a peak inflation rate of more than 79.6 billion percent. An inflation level of that amount is nearly impossible to predict and can easily ruin a country financially.
• The fall of the Soviet Union, the terrorist attack in the US on September 11, 2001, also fall in the same category.

Is the Covid-19 pandemic a black swan event?

• According to Taleb, it was a “white swan” event because it was predictable.
• Outbreaks of any pandemic are difficult to individually predict, but the possibility of one occurring and having a major impact on systems around the world was known and documented.

Source: IE