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Financial institutions started to sink, many were absorbed by larger entities, and the US Government was forced to offer bailouts, precipitated by the sudden, severe crash of what had previously been a booming housing market. According to Taleb, an event must fit three criteria in order to be considered a black swan. The 2008 financial crash was the last well-known black swan event. A black swan event refers to something very specific, but it’s not necessarily tied to just one industry (hence why you may hear doctors, stock market enthusiasts, and/or historians use the phrase). Let’s dive in (pun intended)! Hindsight bias is the misconception, after the fact, that one "always knew" that they were right. In his 2007 book Fooled By Randomness, statistician Nassim Nicholas Taleb says that nearly all major scientific discoveries, historical events, and artistic accomplishments are black swan events. With a high sea wall, backup generators and extensive emergency planning, the Fukushima nuclear plant seemed ready for anything. Of course, that’s not to say pandemics are not bad. Black swan events in the financial industry. Still confused? The number of first-time unemployment filings – as of the end of April – surpassed 30 million in just six weeks, meaning nearly 20% of the United States’ workforce is without work. The Global Financial Crisis of 2008-2009 refers to the massive financial crisis the world faced from 2008 to 2009. Perhaps the most terrifying feature of the COVID-19 pandemic is the sheer uncertainty that still surrounds it. Since then, “black swan” describes situations where perceived impossibilities have been disproven and paradigms have been shattered. Every day, we learn a little more about the catastrophic effects caused by the global pandemic. This bias is an important concept in behavioral finance theory. The 2008 crash was catastrophic, and only a few were able to predict the event. Click here to learn more about SCFO Labs[/box], The Art of the CFO: Virtual Financial Leadership Workshop. You may have heard the term “Black Swan Event“, particularly recently. Interest rates fell more than 4% from 2001 to 2008, and there was plenty of “easy money” available to both individuals and businesses. This gave rise to the notion that such creatures didn’t exist. But just how bad will it eventually be? In other words, people might say something like, “We should have seen this coming.” In reality, you can’t see a black swan coming. Examples Taleb gives of black swan events include the rise of the Internet, the personal computer, World War I, the dissolution of the Soviet Union and the September 11, 2001 terrorist attacks. And not all crises are black swan events. In an attempt to prevent a similar situation from reoccurring, governments worldwide massively increased regulations for financial institutions, placing stricter guidelines on which types of (and how much) debt they could take on. Learn financial modeling and valuation in Excel the easy way, with step-by-step training. The effect of … The world is currently living in, and after, one of the best examples of a black swan event. Structural unemployment is a type of unemployment caused by the discrepancy between the skills possessed by the unemployed population and the jobs available in the market. The phrase "black swan" derives from a Latin expression; its oldest known occurrence is from the 2nd-century Roman poet Juvenal's characterization in his Satire VI of something being "rara avis in terris nigroque simillima cygno" ("a rare bird in the lands and very much like a black swan"). In this article, we provide examples of black swan events as they relate to the financial industry. According to Taleb, not by attempting to predict the unpredictable. are the context in which black swan events are most commonly referred to. certification program, designed to transform anyone into a world-class financial analyst. Every black swan event must: The world is currently living in, and after, one of the best examples of a black swan event. On March 11, 2011 a massive tsunami struck, resulting in the partial meltdowns of three reactors The term “black swan” was originally coined in 1697, when William de Vlamingh discovered a real one in Australia. In order for an event to be considered a black swan, Taleb listed three elements (or attributes) that the event must possess. Though the 2008 financial crash of the U.S. housing market was the first time when this term was used, there have been several such events before. The importance of the metaphor lies in its analogy to the fragility of any system of thought. Companies that export steel and aluminum to the United States, namely those located in Canada, Mexico, and Brazil, were not expecting such an announcement by the US President. The term “black swan event” quickly grew in use and popularity after Nassim Nicholas Taleb, a prolific Wall Street trader, wrote about the black swan theory in his book, “Fooled by Randomness,” which was published in 2001. Such an inflation level was almost impossible to predict and was … Taleb argues that rather than trying to predict the unpredictable, companies (and society as a whole) should instead build robust systems that can withstand negative events. At the time, it was sort of like saying something is as rare as flying pigs. In addition, he advises that we position ourselves to be able to exploit the positive ones. Mitch McConnell Shocks the Internet With Photo of His Hands — Is He Secretly Super Sick. The step-by-step plan to get ahead of your cash flow. Zimbabwe’s hyperinflation in 2008 is also one such event. More recently, a black swan event has become a common way to describe certain unforeseen downturns in the financial realm, especially when referring to the housing market crash of 2008. Many small businesses are facing bankruptcy and may not have the resources to reopen once the government gives them the green light. However, in March 2020, Taleb (along with investor Mark Spitznagel) wrote an article explaining that the pandemic was actually a white swan (in fact, his 2007 book had explicitly defined a then-hypothetical global pandemic as such). Examples Taleb gives of black swan events include the rise of the Internet, the personal computer, World War I, the dissolution of the Soviet Union and the September 11, 2001 terrorist attacks. Financial markets, from the name itself, are a type of marketplace that provides an avenue for the sale and purchase of assets such as bonds, stocks, foreign exchange, and derivatives. For example, the imposition of a steel and aluminum tariff by the President of the United States may be considered a black swan event. He defines three attributes that are common to all black swan events: The origin of the use of the term “black swan” to characterize such events is interesting. It certainly meets the “unexpected” requirement, as the pandemic arose suddenly, and it quickly became apparent that no country was prepared to deal with it. We’ll explain what a black swan event is, plus give some examples of black swan events that have occurred in the past. How you did in this pandemic, as a country, a village, a business, a group, or an individual, whether emotionally, economically, or morally, is an indication of how robust you are and how fit you will be for the next decades. He underscores the point that the black swan event depends upon the observer. No, it doesn’t mean you’re headed to the ballet. 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