I am hearing a lot of misuse of the term “black swan” these days. Here is a succinct definition from the populizer of the idea, Nassim Taleb:
What we call here a Black Swan (and capitalize it) 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 concoct explanations for its occurrence after the fact, making it explainable and predictable.
Most of the things being touted as “Black Swans”, e.g. the attacks on September 11, 2001, the financial crisis, the Deepwater Horizon catastrophe, aren’t. They don’t meet the first condition.
The attacks on 9/11 had clear antecedents. For goodness sake, there had been a previous attack by Islamist radicals on the World Trade Center. Everybody knew that a financial crisis was brewing. It had been warned about for years. Very few predicted the precise circumstances of the crisis but the general outlines were obvious and patent.
And we’ve had oil spills before and deepwater drilling accidents before. That there would be a major deepwater drilling accident with an attendant oil spill is, again, obvious and patent.
The better analogy for these things would be Russian Roulette. If you play Russian Roulette long enough the probability of somebody getting killed is 100%. Even with replacement, i.e. you spin the chamber with every “turn”, the probability approaches 100%.
All of these things are like living on a fault line or a flood plain. Eventually you come to ignore the potential disaster and regard it as normal and safe. But that’s merely an illusion, a trick of the mind.
The secret of avoiding disaster from catastrophes like the attacks on September 11, 2001, the financial crisis, and the Deepwater Horizon disaster is not to play. We’ve got to change the rules. Pretending the obvious and inevitable was unforeseeable is willful blindness.
Award of the Nobel Peace Prize to war criminal Henry Kissinger was a Black Swan and had the important effect (Tom Lehrer: the day irony died) of devaluing the Prize earned by Woodrow Wilson and Martin Luther King Jr, the Red Cross, the Quakers and others.
Afterward, the award of the Prize to terrorists Begin and Sadat, women’s rights oppressor Mother Theresa, blowhard Gore and do-nothing Obama were to be expected.
– Jon Stewart
“Most of the things being touted as “Black Swansâ€, e.g. the attacks on September 11, 2001, the financial crisis, the Deepwater Horizon catastrophe, aren’t. They don’t meet the first condition.”
All eminently predictable, just not the timing, as you point out. Setting aside 9/11, the latter two represent misaligned incentives (among many other things). The short term profits to be gained by BP and the financial sector outweighed the longer term concerns of a possible disaster, especially since one had not happened for a while.
9/11 and the response from many still surprises me. Did Americans really believe that we could much around in the internal affairs of other countries for decades without ever facing some sort of reprisal? As to the specifics, add in Operation Bojinka.
Steve
Does it affect whether or not it’s a “black swan” event if it occurred before? I’m thinking things like a sudden eruption of the Yellowstone super-volcano, or a Tunguska-type event occurring over a major city, or the like.
By definition a Black Swan event is unforeseeable. If something has happened before and is expected to happen again (even if when it might occur is not foreseeable), it is not a Black Swan event.
Dave,
I think you’ve unreasonably constrained the definition. We couldn’t consider 1 in 10000 year events, or even 1 in 100000 year events black swans because they’ve happened before and so will happen again? Take a look at this. If a similar event happened tomorrow you wouldn’t call it a black swan?
It’s not my definition but Taleb’s (the popularizer’s) definition, quoted above:
I think you’re reading too much into that phrase, especially since the previous phrase says, “lies outside the realm of regular expectations” and not “outside all expectations.” Regardless, if your interpretation is accurate, then it would seem black swans are virtually impossible.