Black Swans flocking everywhere

A terrific column by Jeff Frankel.

He says August is the time for extreme events which are also called as Black Swans (his blog post has more details):

Throughout history, major political and economic shocks have often occurred in August, when leaders have gone on vacation believing that world affairs are quiet. Consider World War I’s outbreak in 1914, the Nazi-Soviet pact in 1939, the Sputnik launch in 1957, the Berlin Wall in 1961, and the failed coup in Moscow of 1991. Then there was the Nixon shock of 1971 (when the American president took the dollar off the gold standard and imposed wage, price, and trade controls), the 1982 international debt crisis in Mexico, the 1992 crisis in the European Exchange Rate Mechanism, and the 2007 subprime mortgage crisis in the United States.

Many of these shocks constituted events that had previously been considered unthinkable. They were not even on the radar screen. Such developments have been called “black swans” – events of inconceivably tiny probability.

However, black swan is not about events which cannot be predicted etc. It is basically human mind which has memory loss:

But, in my view, “black swan” should refer to something else: an event that is considered virtually impossible by those whose frame of reference is limited in time and geographical area, but not by those who consider other countries and other decades or centuries.

The origin of the black swan metaphor was the belief that all swans are white, a conclusion that a nineteenth-century Englishman might have reached based on a lifetime of personal observation and David Hume’s principle of induction. But ornithologists already knew that black swans existed in Australia, having discovered them in 1697.  They should not have been viewed as “unthinkable.”

We have seen several events  recently which are termed as black swans but have been present through out history: 9/11, assuming house prices will continue to rise, mispricing risks, banks can’t fail, govt. debt is never a problem etc.

He even ponders on probable black swans in future.

  • Oil crisis
  • Overpriced bond market
  • Repeat of disputed  Presidential elections seen in 2000
  • Terrorist attack with WMD
  • Climate disaster

Black swans flocking all around. Well, some are not truly black swans as we have seen them in the past as well. But that is what is being seen as black swans these days..

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