Explained: What is a black swan event?

What is the News?

A study by the Reserve Bank of India(RBI) has spoken about the possibility of capital outflows to the tune of $100 billion from India in case of a major global risk scenario or a “Black Swan” event.

What is Black Swan Event?

A Black Swan is a rare, unpredictable event that comes as a surprise and has a significant impact on society or the world.

These events are said to have three distinguishing characteristics – 1) They are extremely rare and outside the realm of regular expectations, 2) They have a severe impact after they hit and 3) They seem probable in hindsight when plausible explanations appear.

What is the origin of the term Black Swan?

The black swan theory was put forward by author and investor Nassim Nicholas Taleb in 2001. 

The term is also linked to the discovery of black swans. Europeans believed all swans to be white until 1697 when a Dutch explorer spotted the first black swan in Australia. Hence, the metaphor ‘black swan event’ is derived from this unprecedented spotting from the 17th century and how it upended the West’s understanding of swans.

Have Black Swan Events occurred in the past?

According to Nicholas Taleb, the past Black Swan events are 1) The 2008 global financial crisis – triggered by a sudden crash in the booming housing market in the US, 2) The fall of the Soviet Union and 3) The terrorist attack in the US on September 11, 2001.

On Covid-19, Taleb called it a “white swan” event arguing that it was predictable and there was no excuse for companies and governments not to be prepared for something like this.

Source: The post is based on the article “Explained: What is a black swan event?” published in Indian Express on 20th June 2022.