Black Swan Events: Definition, Examples & Implications

A black swan event, a phrase commonly used in the world of financeCorporate Finance OverviewCorporate finance deals with the capital structure of a corporation, including its funding and the actions that management takes to increase the value of, is an extremely negative event or occurrence that is impossibly difficult to predict. In other words, black swan events are events that are unexpected and unknowable. The term was popularized by former Wall Street trader Nassim Nicholas Taleb, who wrote about the concept in his 2001 book Fooled by Randomness.

Attributes of Black Swan Events

Taleb outlined the three defining attributes of a black swan event:

1. An event that is unpredictable.
2. A black swan event results in severe and widespread consequencesScenario AnalysisScenario analysis is a process of examining and evaluating possible events or scenarios that could take place in the future and predicting the.
3. After the occurrence of a black swan event, people will rationalize the event as having been predictable (known as the hindsight bias).

Example of a Black Swan Event

For example, the imposition of a steel and aluminum tariff by the President of the United States may be considered a black swan event. 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.

Understanding the Black Swan

Although black swan events seem to come with a negative connotation, the concept does not only apply to negative events. Whether the event is positive or negative depends on the perspective of the individual.

For example, a disastrous day in the stock marketStock MarketThe stock market refers to public markets that exist for issuing, buying and selling stocks that trade on a stock exchange or over-the-counter. Stocks, also known as equities, represent fractional ownership in a company may be seen as a positive event for an investor with aggressive short positionsLong and Short PositionsIn investing, long and short positions represent directional bets by investors that a security will either go up (when long) or down (when short). In the trading of assets, an investor can take two types of positions: long and short. An investor can either buy an asset (going long), or sell it (going short). but a negative event for an investor who has heavily bought into the market.

Real-life Examples

Throughout history, there have been several notable black swan events. Here are five prominent ones from the finance world:

1. The 1997 Asian Financial Crisis

The Asian financial crisis in 1997 was a series of currency devaluations that spread throughout several Asian markets, starting when Thailand unpegged the baht to the US dollar. As a result of the ensuing crisis, Asian currencies dropped by as much as 38% and international stocks declined by nearly 60%.

2. The “Dotcom” Crash

Due to the rapid growth in internet usage in the 1980s and 1990s, many internet companies were launched. However, a lot of these companies failed after some time. In addition, many of those that were successful were severely overvalued. From 2000 to 2002, several internet companies crashed, resulting in significant losses for investors. The dotcom crash wiped out nearly a trillion dollars worth of stock value. The NASDAQ Composite lost 78% of its value in the dotcom crash.

3. 9/11 Attacks

The attack on the Twin Towers of New York’s World Trade Center prompted the closure of the NYSE and NASDAQ on the morning of September 11, 2001. Stocks plummeted during the first trading week after 9/11 – $1.4 trillion in stock market value was lost within a week.

4. The 2008 Global Financial Crisis

The global financial crisis in 2008 caused Lehman Brothers to file for bankruptcyBankruptcyBankruptcy is the legal status of a human or a non-human entity (a firm or a government agency) that is unable to repay its outstanding debts – the largest bankruptcy filing in US history. Over 25,000 Lehman employees went jobless and more than $46 billion of Lehman’s market value was wiped out. In total, over $10 trillion was eventually wiped out in the global equity markets.

5. Brexit

In June 2016, news of the British referendum’s decision to leave the European Union caught many by surprise. It caused the British pound to sharply drop to a 31-year low against the US dollar. The Brexit vote wiped out nearly $2 trillion of value in global markets.

Other Resources

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