Black swan events

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Context

• Army Chief Gen Manoj Pande on Monday called upon the force to be always prepared for 'black swan' events.

What is a ‘black swan’ event?

• A black swan is a rare, unpredictable event that comes as a surprise and has a significant impact on society or the world.

Distinguishing Characteristics

These events are said to have three distinguishing characteristics –

• They are extremely rare and outside the realm of regular expectations;
• They have a severe impact after they hit; and
• They seem probable in hindsight when plausible explanations appear.

When did the term originate?

• The black swan theory was put forward by author and investor Nassim Nicholas Taleb in 2001, and later popularised in his 2007 book – The Black Swan: The Impact of the Highly Improbable.
• In his book, Taleb stresses on building “robustness” in systems and strategies to deal with black swan occurrences and withstand their impact.

When have such events occurred in the past?

• 2008 global financial crisis – a black swan event triggered by a sudden crash in the booming housing market in the US.
• The fall of the Soviet Union in 1991
• The terrorist attack in the US on September 11, 2001
• Also, in 2008, Zimbabwe had the worst case of hyperinflation in the 21st century with a peak inflation rate of more than 79.6 billion percent. An inflation level of that amount is nearly impossible to predict and can easily ruin a country financially.

Threat of Black Swan events for India

• Economic Disruption
  • Black Swan events can disrupt economies, industries, and societies on a large scale.
  • It can cause sudden and unexpected disruption in financial markets, business operations, etc.
• Uncertain and unpredictable
  • Black swarm events have high levels of uncertainty as they are difficult to predict using conventional methods.
  • This uncertainty makes planning and decision-making difficult for individuals, organisations, and governments.
• Vulnerability is exposed
  • Black Swan events reveal vulnerabilities in systems which were previously thought to be robust or resilient.
  • They also reveal weaknesses in risk management activities and highlight a need for greater preparedness and resilience.

Grey Swan Event ●A grey swan is an event that is known and possible to happen, but which is assumed to be unlikely to occur. The term derives from black swan theory, which describes an event which is unlikely but unknown. ●A grey swan event is an outlier, but which is more probable than a black swan. ●As a result, people can better prepare for and hedge against a grey swan than for a black swan.

Source: https://economictimes.indiatimes.com/news/defence/be-prepared-for-black-swan-events-expect-the-unexpected-army-chief-to-force/articleshow/109136158.cms?from=mdr

PRACTICE QUESTION Q. Consider the following statements about “Black Swan” A Black Swan is an event that is known and possible to happen, but which is assumed to be unlikely to occur. They are extremely rare and outside the realm of regular expectations. In 2008, Zimbabwe had the worst case of hyperinflation and this can be categorised as Black Swan event. Black Swan events reveal vulnerabilities in systems which were previously thought to be robust or resilient. How many of the above statements is/are correct? Only one Only two Only three All Three Answer- 3