Clara Chua | 25 November 2021
What is a black swan event and what are some examples of it?
Wall Street trader Nassim Nicholas Taleb popularised this concept in his book, outlining the three defining attributes. A black swan event has to be unpredictable. It will result in severe and widespread consequences. Ultimately, after the occurrence of a black swan event, people will falsely claim it should have been predictable.
Often the reliance on conventional forecasting tools can fail to predict and potentially increase vulnerability to black swans by propagating risk and offering false security. Rather than trying to predict the next black swan event to cope with the effects, companies should focus on building stability and exploiting the positive ones.
Is COVID-19 Considered a Black Swan Event?
The simple answer concluded during an interview with Taleb and The New Yorker is that the pandemic should not be considered a black swan event. There is even a possible danger of making an occurrence like the COVID-19 outbreak appear to be extremely rare, as people will tend to treat it as such – failing to prepare for the next catastrophic event.
With the pandemic being entirely predictable by leading individuals, like Bill Gates and Laurie Garrett, it is not a question of if it will occur, but usually when it will. Governments would also often conduct exercises and simulations to determine how to get ahead of such uncertainties.
In one way, it is fundamental to guide the company through an inevitable crisis and survive the aftermath that follows. Another approach is accepting that risks and future black swan events will always exist, but so will opportunities that can help develop companies.
Examples of Past Black Swan Events
During the 2008 financial crisis, one of the most recent and catastrophic, the crash of the US housing market was considered to be such an event. While only a few outliers were able to predict it happening, it had a global impact and caused the Lehman Brothers to file for the largest bankruptcy in US history.
Some black swan events may be even more unforeseeable. The attack on the Twin Towers of New York’s World Trade Center plummeted stocks during the first trading week, losing $1.4 trillion in the stock market within a week. While natural disasters such as Hurricane Katrina resulted in more than 1,800 deaths and left many people homeless as more than 800,000 housing units were destroyed.
Keys to Managing Black Swan Events
Ability to dissociate emotion is principal for a company when confronting such chaos. Decisions are better made alongside accurate and objective data, tapping into survivor psychology to prevent unintentional blindness.
Strong leadership where individuals take responsibility for their actions. Instead of finger pointing and second guessing, a clear confidence can help ignite persistence in bleak times. It is crucial for the higher management positions to break the situation into feasible steps for tactical response.
Keep the organisation financially prepared with a simple guideline: Expect a major disruption to the company every 10 years or so, which will require 6 months cash on hand to weather it. The employees’ awareness of finance and treasury issues would also affect how a company responds to the challenges of disruption.
Create a financial contingency plan to be incorporated into the ongoing operations. In the case where a black swan event occurs, the financial management is able to find time to decipher what is happening and its impact on the company.
Utilising technology to accelerate gathering data and merging it for analysis with measurable results. With the use of dashboards, this information would appear more accessible and help stakeholders understand the core issue. This can help negate the ambiguity and analysis paralysis that accompanies large volumes of data.