#791 What is a black swan event?

What is a black swan event? It is a completely surprising and unpredictable event that has major consequences. It is something that is as rare as a black swan.

The phrase was first used in Rome in the 2^nd century BC and its usage was to show that an event was as rare on Earth as a black swan. At the time, nobody thought that a black swan could exist, so any black swan event was so exceedingly rare as to be almost impossible. However, in 1697, a Dutch explorer found black swans in Australia. They are not as rare as first thought, just rare in the northern hemisphere. They have probably evolved to be black in the Southern Hemisphere for camouflage. The white swans we have in the northern hemisphere might have evolved to be white to hide in snow, but there is not enough snow for that to be a satisfactory explanation. It is far more likely that they evolved to be white as a way of attracting a mate.

When black swans were discovered, the term “as unlikely as a black swan” changed to illustrate the fallacy of thinking that any system of thought is foolproof. Something can seem impossible until it is later proved to be possible. A Scottish philosopher called David Hume summed it up by saying, “No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.” This means that we see only white swans, so we infer that all swans are white. When we find a black swan, we learn that everything we thought was wrong and have to reevaluate everything. All our systems of thinking can be like this.

So, what is an example of a black swan event? The existing expression was used in 2007 for the first time with its current meaning. There are three criteria. It is an event that is so far out of our expectations that it cannot be predicted. It has an enormous effect on humanity. People with hindsight say that it should have been predicted. The Covid 19 pandemic is a good example. Many events that happen and cause a lot of problems were usually predictable. The recession in 1929, the subprime mortgage crisis in 2008, and many other financial meltdowns were all possible to predict. The market was following known patterns that could be modeled and predicted. The fact that they weren’t noticed by so many people is more because people were very invested in the way the financial market was going at the time and chose not to see the truth or chose not to predict it. These are not black swan events because they were predictable. The Covid pandemic that hit in 2020 was not predictable. Yes, it was possible to predict that a pandemic might hit at some time, but that pandemic at that time was not predictable. And it caused, and is still causing, huge damage to the world in many ways. All of that, coupled with the fact that people now say the signs of the pandemic were there all along and people just didn’t see them, makes it a black swan event.

The problem with black swan events is that they cannot be predicted. Models of the future, especially financial models, can only deal with known variables. There is no way to plot in black swan events. There was no way to know the First World War would become as huge as it did. There was no way to know the Twin Towers would be attacked. And so on and so on. There are so many black swan events and they all come out of the blue.

One thing that is interesting about black swan events is how we come up with reasons why they should have been predictable after the fact. At the time, no one was able to predict them because they were so far off the scale of expected events that their prediction was impossible. After the event, many people use hindsight and look at how the event happened. They then use these reasons to say that people should have been able to predict the event, despite the fact that nobody did or could.

Black swan events are also good examples of how we shouldn’t be caught up by confirmation bias. This is where we give greater weight to information and events that fit our existing beliefs. It is the reason why people are so blindsided by black swan events. We know that there hasn’t been a global pandemic for 36,000 days, so we assume there won’t be a global pandemic on the 36,001^st day. And then one comes. And this is what I learned today.

Photo by Anthony 🙂: https://www.pexels.com/photo/two-black-ducks-on-grass-lawn-133625/

Sources

https://www.investopedia.com/articles/trading/11/black-swan-events-investing.asp

https://en.wikipedia.org/wiki/Black_swan_theory

https://www.fool.com/terms/b/black-swan-event/

https://en.wikipedia.org/wiki/Black_swan