What is a Black Swan event? “Black Swan” is a metaphor that usually describes a rare, large-scale, large-impact event that is extremely difficult to predict.Such events are unexpected, usually unprecedented, and normally seen as ‘outliers.’When they do occur, the complete lack of anticipation of such a significant happening tends to cause chaos, confusion and disruption. These may persist long after the event has occurred, adding to the initial damage caused by the event, leading to a negative perception of Black Swans in general.
Nassim Nicholas Taleb, who popularised the term, described the traits of such events as being rare, resulting in severe consequences, and rationalised in retrospect, i.e., after the event has happened. But what actually constitutes a Black Swan event? Many point to the September 11, 2001 incidents in the US as an example. There are some who see the Global Financial Crisis of 2008 as another. More recently, the Covid-19 pandemic, which brought unprecedented disruption, uncertainty and long-term consequences to every continent on the planet, was seen as a Black Swan event by some as well.
However, as unprecedented as these events were at the time, there were indicators that they were going to happen. The perpetrators of the September 11th terrorist attacks were already ‘persons of interest’ known to the authorities; in many financial systems, there were signs that all was not well before the 2008 financial crisis hit; and in even in Wuhan, where the Covid-19 virus is thought to have originated, there were indications of a new viral strain that could have more serious consequences than others. In retrospect, therefore –after the event – many conclude that “it was bound to happen.”
It cannot be denied that in these cases, some people may have been aware of the approaching incidents while many others may have just ignored the warning signs. In other words, whether an event can be classified as a Black Swan or not, depends on the information that is available at the material time. With this in mind, the Black Swan theory is actually an encouragement not to attempt to predict the improbable, but to examine the measures already in place and determine how to limit possible losses should such an event occur.
Ultimately, a Black Swan cannot be predicted, nor can anyone determine how the event will play out, but taken within the right context, knowing that such an event can occur helps to focus attitudes and mindsets on how to prepare and respond properly to disasters. A major deterrent is perhaps the lack of data which can accurately pinpoint the next occurrence of the event. Also, such events usually do not repeat themselves, making accurate modelling difficult. But while companies may find it extremely challenging to try and anticipate Black Swans, they should not let fear and hesitancy over trying to anticipate the unanticipated deter them.
Such events may have significantly negative connotations, and the negative impacts tend to be more obvious, but one advantage is that being relatively high-profile, Black Swans have attracted a great deal of attention and there is probably documentation of similar events which occurred in the past. Anticipating any untoward or negative event necessitates doing due diligence; there may be more information on Black Swans after they have happened, precisely because they were so unexpected. This big-picture information is crucial, as it provides an idea of what conditions were like when the event occurred, even if the event was unprecedented.
As in all mitigation plans, a proper framework is necessary. Practically all aspects of ERM can be applied when setting this in place, as the thinking processes that take Black Swans into consideration, and the data generated from those processes, can also be applied strategically to how the organisation can make better decisions to improve its operations and continuously search for better solutions to its challenges. What should be kept in mind is that contexts and circumstances change but situational analyses and changing scenarios can still be applied.
The positive effect of Black Swan events tends to be overlooked, perhaps because the negative outcomes have longer, more extensive repercussions. Some management experts have even singled out the Dot-Com Era as a positive Black Swan event, as it ushered in digitisation on a global scale, gave rise to the Internet, and jump-started connectivity between devices on an unprecedented scale. Although the subsequent Dot-Com Shakeout saw many start-ups folding, companies like Amazon, with strong fundamentals and a firm grasp of innovation, emerged as industry leaders.
But what should companies do if they want to be prepared not just for Black Swans, but any event that would qualify as unprecedented within their respective contexts? Risk professionals can ask qualitative questions and seek out multiple perspectives of previous events. Technology today goes a long way towards supporting forecasting, and organisations should encourage the development of a culture where everyone learns to observe what is happening internally and externally, and is able to contextualise it. This is similar to the iterative process of ERM in many ways.
Companies should identify changes in their respective ‘normal’ conditions, and try to understand what may be causing these. From there, they may be able to project what will be required for realignment with normal conditions again, and concentrate on putting in place the processes and procedures that will help them stay on track.
