Black Swans Are NOT Black Swans
The term Black Swan was coined by Nassim Nicholas Taleb, a Finance professor, and former Wall Street quant trader, and was popularized after the meltdown that resulting after the Financial crisis of 2008.
Per investopedia, the definition of black swan event is:
A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the practice of explaining widespread failure to predict them as simple folly in hindsight.
It seems to me, the defining characteristic of a black swan event is they are “ … characterized by their extreme rarity..”. Let’s look at some “black swans”
Coronavirus: The Black Swan of 2020 from Sequoia
In this widely read warning, Coronavirus is identified as a black swan. Is it? Well its a pandemic. So are pandemics black swans? Are pandemics ““ … characterized by their extreme rarity..” So you may ask, when was the last pandemic? Well the last pandemic before Caronavirus killed 954,000 people in 2017. It’s called HIV/AIDS.
On 8 August 2014, the WHO has declared the Ebola virus outbreak a public health emergency of international concern. Over 11,00 people died from the virus from 2013–2016.
The “Hong Kong Flu” was first detected in Hong Kong in early 1968, and spread to the United States later that year. It killed approximately one million people in 1968/1969 worldwide including 34,000 deaths in the United States.
In 1967, the World Health Organization estimated that 15 million people contracted smallpox, and two million died in that year.
Now I could go on and on and on. But pandemics aren’t black swans that occur rarely, even if Pantera says it is. They occur all the time. Here’s Nasim Taleb himself calling COVID-19 a white swan:
Black Swans In Investing
Going back to Investopedia, in what seems pretty random to me they say
- “Downturns or crashes such as Black Monday, the stock market crash of 1987 or the internet bubble of 2000 were relatively model-able” — so not black swans
- “… but the Sept. 11 attacks were far less so. And who really expected Enron to implode? As for Bernie Madoff, one could argue either way.” — the first two are black swans, the last maybe.
More enlightening, there was an article posted in Data Driven Investor titled “9 Black Swan Events that changed the Financial World”:
So that’s 9 black swans in 20 years. That statement is an oxymoron. You can’t have 9 “extremely rare” events in 20 years.
Why Do We Call Them Black Swans
We call them black swans because we can’t predict them.
I get that the definition of “rare” is open to interpretation. A statement as simple as “three times a week” can be interpreted as “almost never” or “constantly”:
But calling things like the Caronavirus a “black swan” gives cover to Trump for not being prepared. Michael Lewis understands this. in his latest book “The Fifth Risk” he presciently predicted the disaster Trump was creating by hollowing out government departments that worked to prevent “rare” events.
Calling the mortgage meltdown in 2008 a black swan, lets all the CEOs of insolvent banks off the hook. What could they have done?
And on and on and on.
Most things we call black swans happen ALL the time. So we should be prepared. Because the part of the Investopedia definition that is true of events we call black swans, is “.. their severe impact.”
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