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Glossary

Black Swan Event

November 21, 2023 - Around 3 mins mins to read

Understanding the Concept of a Black Swan Event

A black swan event is an extremely rare and impactful occurrence that was coined by Nassim Nicholas Taleb, a finance professor, former Wall Street trader, and writer. In his 2007 book, Taleb discusses the concept of a black swan event, which is an event that cannot be predicted but has catastrophic consequences. He emphasizes the importance of anticipating the possibilities of these highly uncommon and unpredictable events and planning accordingly.

Taleb defines a black swan as an event that is so rare that its probability of occurrence is unknown. There are three key components of such an incident:

  1. When it does happen, it leads to disastrous consequences.
  2. It can only be explained in hindsight.
  3. Observers are eager to explain and speculate on how it could have been predicted before it occurred.

The Black Swan Theory, also known as the Theory of Black Swan Events, can be traced back to a Latin phrase used by the Roman poet Juvenal in the 2nd century. He described something as a “black swan event” using the phrase “in terris nigroque simillima cygno rara avis,” which means “an unusual bird in the lands that looks a lot like a black swan.” This proverb was coined at a time when black swans were believed to be non-existent.

In the financial (and cryptocurrency) markets, a black swan event is highly unfavorable and often results in widespread devastation with unpredictable consequences. The most well-known example of a black swan event in the world of finance is the Global Financial Crisis of 2008. This crisis was triggered by the unexpected and catastrophic collapse of the previously thriving property market.

Lenders in the United States had significantly relaxed their eligibility requirements for mortgages, largely due to pressure from the federal government. Mortgages were granted to individuals with poor or no credit for properties that were clearly beyond their financial means.

Subprime mortgages quickly formed a massive bubble that was on the verge of bursting. Major financial institutions like Lehman Brothers began to crumble and fail as mortgage payments were missed and defaults skyrocketed.

To address the crisis, the US government implemented the Troubled Asset Relief Program (TARP), a program worth approximately $1 trillion aimed at bailing out large banks and restoring liquidity to the economy. In order to prevent a recurrence of the 2008 crisis, governments worldwide tightened regulations for financial institutions, making it more challenging for them to take on certain types and amounts of debt.

Currently, the world is grappling with and recovering from one of the most remarkable examples of a black swan event – the COVID-19 pandemic. This pandemic fulfills all of Taleb’s criteria for a black swan event. It struck without warning, and it became evident that no country was adequately prepared to handle it. Each day, we continue to learn more about the devastating impacts of this global pandemic, including record-breaking unemployment rates, stock market crashes, and an ever-increasing death toll.

Similar to how it is impossible to predict the sighting of a black swan among a flock of white ones, the occurrence of a black swan event remains unpredictable.

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Coincu

Glossary

Black Swan Event

Understanding the Concept of a Black Swan Event

A black swan event is an extremely rare and impactful occurrence that was coined by Nassim Nicholas Taleb, a finance professor, former Wall Street trader, and writer. In his 2007 book, Taleb discusses the concept of a black swan event, which is an event that cannot be predicted but has catastrophic consequences. He emphasizes the importance of anticipating the possibilities of these highly uncommon and unpredictable events and planning accordingly.

Taleb defines a black swan as an event that is so rare that its probability of occurrence is unknown. There are three key components of such an incident:

  1. When it does happen, it leads to disastrous consequences.
  2. It can only be explained in hindsight.
  3. Observers are eager to explain and speculate on how it could have been predicted before it occurred.

The Black Swan Theory, also known as the Theory of Black Swan Events, can be traced back to a Latin phrase used by the Roman poet Juvenal in the 2nd century. He described something as a “black swan event” using the phrase “in terris nigroque simillima cygno rara avis,” which means “an unusual bird in the lands that looks a lot like a black swan.” This proverb was coined at a time when black swans were believed to be non-existent.

In the financial (and cryptocurrency) markets, a black swan event is highly unfavorable and often results in widespread devastation with unpredictable consequences. The most well-known example of a black swan event in the world of finance is the Global Financial Crisis of 2008. This crisis was triggered by the unexpected and catastrophic collapse of the previously thriving property market.

Lenders in the United States had significantly relaxed their eligibility requirements for mortgages, largely due to pressure from the federal government. Mortgages were granted to individuals with poor or no credit for properties that were clearly beyond their financial means.

Subprime mortgages quickly formed a massive bubble that was on the verge of bursting. Major financial institutions like Lehman Brothers began to crumble and fail as mortgage payments were missed and defaults skyrocketed.

To address the crisis, the US government implemented the Troubled Asset Relief Program (TARP), a program worth approximately $1 trillion aimed at bailing out large banks and restoring liquidity to the economy. In order to prevent a recurrence of the 2008 crisis, governments worldwide tightened regulations for financial institutions, making it more challenging for them to take on certain types and amounts of debt.

Currently, the world is grappling with and recovering from one of the most remarkable examples of a black swan event – the COVID-19 pandemic. This pandemic fulfills all of Taleb’s criteria for a black swan event. It struck without warning, and it became evident that no country was adequately prepared to handle it. Each day, we continue to learn more about the devastating impacts of this global pandemic, including record-breaking unemployment rates, stock market crashes, and an ever-increasing death toll.

Similar to how it is impossible to predict the sighting of a black swan among a flock of white ones, the occurrence of a black swan event remains unpredictable.

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