What are Black Swans and why is it important?

When we talk about a "Black Swan" type event or occurrence, we are referring to an absolutely unexpected event. It is an event that occurs without any warning "signal" and that has major (often negative) repercussions on the course of History.

The term was coined by Nassim Nicholas Taleb, a Lebanese writer living in the USA. Nassim Nicholas Taleb was a trader on Wall Street and is also a professor of finance at New York University.

His book "The Black Swan: The Impact of the Highly Improbable" published in 2007 has since become a reference in financial and economic circles.

The book is available in French: « The black swan: The power of the unpredictable."

Since then, the term "Black Swan" has been used for all historical events that would have been impossible to predict. According to the author, these accidental and powerful events are so rare that even the probability of their occurrence is an unknown.

The books of Nassim Nicholas Taleb have found renewed interest since the Covid-19 crisis.

What is the “Black Swan Theory”?

A Black Swan event is characterized by extreme rarity and very high impact. Typically, the Covid 19 pandemic was a black swan. No one was able to predict its appearance and its impact was such that years later, there are still after-effects.

For Nassim Nicholas Taleb, black swan events are certainly very rare but change the course of history. For him, it is essential to expect this type of event. It is events of this type that have marked the course of human history.

However, not all unexpected events are black swans. Here are the 3 characteristics that must be determined:

The effects of the event are catastrophic.
The event can only be "explained" with hindsight.
We seek to develop hypotheses to rationally and retrospectively explain how the event could have been predicted.

Where does the expression “black swan” come from?

The expression "black swan" can be linked to a phrase taken from the Satires of Juvenal, a Roman poet of the 2nd century AD: "Rara avis in terris nigroque simillima cycno". This means "A rare bird on earth, very rare as a black swan.").

In Juvenal's time, it was thought that black swans did not exist.

What about “black swans” in finance?

Of course, when a "Black Swan" type event appears in the financial (and crypto) markets, it has a devastating effect. The consequences are then unpredictable.

We remember the financial crisis of 2008 caused by the bursting of the sub-prime bubble. Looking back, the real estate market was doing well. Individuals who did not have the means to repay the loans were accepted to take out mortgages on property for which they did not have the means to subscribe. Derivatives were always more valued before the brutal fall, characterized by the bankruptcy of Lehman Brothers. Its fall on September 15, 2008 heralded the global economic crisis of 2008.

To avoid future crises like this, governments have tightened the laws applying to financial institutions. The idea being to make it more difficult to subscribe to certain loans (particularly real estate).

The “black swan” in cryptocurrencies.

For some people, bitcoin itself is a black swan. It is in fact a technological innovation that appeared suddenly and suddenly disrupted the financial industry.

Beyond bitcoin, many events can be described as “mini” black swans. For example, the fall of the UST which announced a series of disastrous events in the crypto sector was not predictable. Today, in retrospect, we can think that the maintenance of interest rates of more than 20% on the Anchor protocol was predictable… Maybe?… That is precisely the whole point of the black swan theory to think that we could have predicted it…

Likewise, recently, the fall of the FTT token (of the FTX platform) would not have been predictable although certain warning signs could have been detected (see video on the accusations hanging over SBF and FTX).

The important thing to remember with the theory of black swan events is the need to remain vigilant. Particularly, the world of cryptocurrencies is still very recent (Bitcoin is only celebrating its 14 years today) and the structuring of the market is happening before our eyes. There's still a lot of gray area, a lot of elements that are being built and destroyed.

You must then remain alert and expect black swans to appear. This is how we prepare. Knowing how to be anti-fragile in a chaotic world. It might also be time to re-read Nassim Nicholas Taleb…

However, it should be noted that Nassim Nicholas Taleb is not a Bitcoin supporter, and that is an understatement. To learn more about his “anti-bitcoin” thinking, you can read our article: Why is Nassim Nicholas Taleb not a Bitcoin supporter?

Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.

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