IS COVID 19 A BLACK SWAN, A WHITE SWAN, OR SIMPLY A GREY RHINO?
Lets quickly look at the meaning and origin of the terms before proceeding.
- Investopedia defined a black swan as an unpredictable, extremely rare event
that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events can cause catastrophic damage to an economy, and because they cannot be predicted, can only be prepared for by building robust systems.
- Reliance on standard forecasting tools can both fail to predict and potentially increase vulnerability to black swans by propagating risk and offering false security.
Wikipedia’s account states that Black swan events were discussed by Nassim Nicholas Taleb (former derivatives trader, risk analyst and a Professor of Risk Engineering at the University of New York) in his 2001 book titled – Fooled By Randomness, which concerned financial events. In his follow up book titled The Black Swan, Taleb extended the metaphor to events outside financial markets.
Taleb regards several of the major scientific discoveries, historical events, and artistic accomplishments as “black swans”—undirected and unpredicted. He gives the rise of the Internet, the personal computer, World War I, the dissolution of the Soviet Union, and the September 11, 2001 attacks as examples of black swan events, simply because all of these are unprecedented. His account states that :
What we call here a Black Swan is an event with the following three attributes.
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility;
Second, it carries an extreme ‘impact’;
Third, In spite of its outlier status, human nature makes us c oncoct explanations for
its occurrence after the fact, making it explainable and predictable.
In summary, the event therefore possesses the following characteristics: Rarity, Extreme ‘impact’, and Retrospective (though not prospective) predictability, that is, the human tendency to find simplistic explanations for these events, retrospectively,
Taleb calls this the Black Swan theory.
Taleb contends that banks and trading firms are vulnerable to hazardous Black Swan events and are exposed to losses beyond those predicted by their defective financial models.
WHY BLACK SWAN
- SWAN is the name of the specie of a large waterbird with typically all-white plumage.
Before the discovery of Australia, people in the old world were convinced that all SWANS were WHITE, an unassailable belief as it seemed completely confirmed by empirical evidence. No one before this time in the old world, had EVER seen a BLACK SWAN; all the existing SWANS at that time were WHITE. The sighting of the first set of black swans in 1697 by a team led by Captain Willem De Vlamingh (who were actually searching for a lost ship on the instruction of the Governor of Dutch East Indies) was frightening, unbelievable, surprising and caught the whole world (at that time) unawares. This is where the term BLACK SWAN originated from. Hence, black Swans are singular, highly unlikely events that are not prepared for.
In the Risk Management matrix, risk events can be HL (High Probability Low Impact), HH (High Probability, High Impact) LH (Low Probability High Impact) or LL (Low Probability, Low Impact). From this matrix, we can see that BLACK SWAN events represent an event with very Low Probability (RARITY) and very high, indeed EXTREME Impact, LH.
Therefore, is the CORONAVIRUS event a BLACK SWAN?
Many of the current generation may not remember that this is not the first pandemic and that there have been many of such, which were even more devastating than the current one. Some of these are highlighted below:
HIV/AIDS PANDEMIC (AT ITS PEAK, 2005-2012)
Death Toll: 36 million
FLU PANDEMIC (1968)
Death Toll: 1 million
ASIAN FLU (1956-1958)
Death Toll: 2 million, 69,800 of the number is from the US alone.
FLU PANDEMIC (1918)
Death Toll: 20 -50 million
SIXTH CHOLERA PANDEMIC (1910-1911)
Death Toll: 800,000+
Like its five previous incarnations, the Sixth Cholera Pandemic originated in India where it killed over 800,000, before spreading to the Middle East, North Africa, Eastern Europe and Russia. American health authorities, having learned from the past, quickly sought to isolate the infected, and in the end only 11 deaths occurred in the U.S. To be continued….
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