It is difficult to predict exactly what black swan events might occur in the future, as these events are by definition rare and unexpected. Critical thinking around past black swans gives a range of possibilities including, pandemics, cyber-attacks, natural disasters, major technological breakthroughs or disruptors, or a geopolitical event, such as a war or a political crisis. Of course, by their very nature the black swan could be from something totally unthought of. Expect the unexpected as a good way to assign a level of risk to your investments, the +1 or 2% wings on the bell curve.
The Origins of Black Swan for Rare and Unpredictable Events
The term “black swan” was popularized by Nassim Nicholas Taleb in his 2007 book “The Black Swan: The Impact of the Highly Improbable.” Taleb used the metaphor of the black swan to describe rare and unpredictable events that have a significant impact on society or the market. The term was inspired by the ancient belief that all swans were white, which was proven false when black swans were discovered in Australia. Taleb used the term to argue that people are often unprepared for rare and unforeseen events, and that we should be more aware of the potential for black swan events and how they might affect us.
Nassim Nicholas Taleb authored in 2007 “The Black Swan: The Impact of the Highly Improbable” The book covers subjects relating to knowledge, aesthetics, as well as ways of life, and uses elements of fiction and anecdotes from the author’s life to elaborate his theories. It spent 36 weeks on the New York Times best-seller list. The book is part of Taleb’s five-volume series, titled the Incerto, including Fooled by Randomness (2001), The Black Swan (2007–2010), The Bed of Procrustes (2010–2016), Antifragile (2012), and Skin in the Game (2018).
Some potential black swan events that could have significant impacts in the future might include:
- A global pandemic with even greater impact than the COVID-19 pandemic. China with 1.4 billion subjected to, and now cancelled strict Zero Covid policy has left very little natural immunity. The result is a petri dish that could flash-produce another pandemic.
- A major cyber-attack that disrupts critical infrastructure or financial systems. It is now estimated more than 50 billion devices are connected to the internet. Each of those devices is a unique point of attack for hackers. In essence we have a vast, undefendable threat surface. Nation states have been honing their cyberattacks abilities, both for defense and offense. The Colonial Pipeline gas network attack in 2021 was an example.
- A natural disaster, such as a massive earthquake or a major hurricane, that causes widespread damage and economic disruption.
- A major technological breakthrough that disrupts entire industries or changes the way we live and work. Think of the changes Amazon and fracking have brought. Expect the unexpected.
- A geopolitical event, such as a war or a political crisis, that impacts the global economy. Top of the list here are an escalation in the Russia-Ukraine war, Chinese attack on Taiwan unrest in Iran involving regional foes Israel and Saudi Arabia.
Again, these are just a few examples of the types of events that could potentially be classified as black swan events in the future. It is impossible to predict exactly what will happen, but it is important for individuals and organizations to be aware of the potential for these types of events and to have contingency plans in place to mitigate their impacts.
Examples of Black Swans in Financial Markets include:
- The 1987 stock market crash, also known as “Black Monday,” which saw the Dow Jones Industrial Average fall by 22.6% in a single day.
- Asian Financial Crisis of 1997
- The 1998 Russian financial crisis, which was caused by a combination of low oil prices and government mismanagement and resulted in a default on Russian government bonds.
- The dot-com bubble of the late 1990s, which saw the value of tech stocks soar before crashing in 2000.
- Fukushima Nuclear Disaster 2001
- Crash of 9/11 2002
- The subprime mortgage crisis of 2007-2008, which was triggered by the collapse of the housing market and led to a global financial crisis.
- Crude Oil Crisis 2014
- Black Monday China 2015
- Brexit 2016
- The COVID-19 pandemic, which caused widespread economic disruption and market volatility as governments implemented lockdowns to slow the spread of the virus.
- Russian Invasion of Ukraine 2022
- FTX Crypto fraud 2022
These are just a few examples of black swan events in financial markets. It’s important to note that black swan events can happen in any industry or sector, and they are often difficult to predict or anticipate.
From The TradersCommunity Research Desk