The Definition of Black Swan Events
The term “Black Swan Event” describes an event that occurs unexpectedly, without warning. Such events are usually rare and have severe consequences that can only be explained retrospectively.
A Black Swan Event has three key components:
- It can have catastrophic and devastating consequences, such as those that can affect the global economy.
- It can only be explained in hindsight.
- Observers try to explain and speculate how it could have been predicted or avoided.
Black Swan Events: Examples
Black Swan Events are gaining increasing attention in the context of IT projects. One example of this is the “eGK – electronic health card” project in Germany.
The project aimed to make health care processes more modern and economical by connecting about 110,000 doctors, 2,000 hospitals, and 300 health insurance companies. The project was very complex and expensive, with costs estimated at about 1 billion DM (511 million euros) in 2001, which increased to 1.4 billion euros just three years later.
The project requirements changed frequently, causing costs to rise steadily, as future developments were largely left out of the equation because they were unpredictable.
Another example of a destructive event is the system failure at Levi Strauss & Company, which decided to modernise its IT operations in 2003 with a new ERP system that was put into operation in spring 2008.
Unexpected technical difficulties caused a system failure lasting a week at all three distribution centres, resulting in a financial loss of about 200 million US dollars for the company.
Where does the name Black Swan Event come from?
The term Black Swan Event was first coined by the financial mathematician, writer and former Wall Street trader Nassim Nicholas Taleb. He describes this phenomenon as so unusual that even the probability of its occurrence cannot be calculated and is therefore unknown. Taleb defines the black swan as an unpredictable event of historical, economic, or personal nature with vast consequences. The writer first dealt with the theory of black swans in the context of financial events in 2001.
The metaphor of black swan refers to the extremely rare black swan, also known as the mourning swan. It is considered the only almost completely black swan in its genus. Until the 18th century, such a black swan embodied the unimaginable, as only white swans were known up to that point.
Grey Swan Events & White Swan Events
In the context of Black Swan Events, one often encounters the term Grey Swan Event. These Grey Swan events differ from Black Swans in that they describe an event that is known and possible, but is considered unlikely.
Typical Grey Swans are extreme weather events and natural disasters such as earthquakes with their sometimes serious consequences, which are partly predictable and occasionally even expected. In electrical engineering, the term Grey Swan (Gray Swan) is also common and refers to events that are rare but have a significant impact on the respective energy system.
There are also White Swan Events, which are events that Taleb considers certain to occur at some point. These events can have equally serious consequences, but their occurrence is rooted in the structure of the modern world and society – a White Swan is thus somewhat predictable.
For example, Taleb regards the COVID-19 pandemic as a White Swan, as the occurrence of a global pandemic, despite its serious impact on an unprepared world, is almost inevitable given the structure of the modern world.
Frequently asked questions and answers
The so-called Black Swan Effect or Black Swan Event is an event, often a global major event, that no one can predict. It occurs suddenly and usually has drastic negative effects on the global economy.
Many refer to the Covid-19 pandemic as a drastic example of a black swan. However, according to Nassim Nicholas Taleb, it is not considered a Black Swan Event. He does not define a global pandemic as unforeseeable, but rather as an event that will certainly occur at an unspecified time. Although the pandemic hit the stock market like a bolt, leading many to believe it was a black swan, pandemics are not considered entirely unforeseeable. They usually occur every 20 to 30 years, with past examples before the Covid-19 pandemic being Influenza or Ebola.
A Black Swan in the stock market leads to devastating consequences for the global economy and causes a collapse of financial markets. The most well-known example of such an event is the global financial crisis of 2008. Banks and other lenders in the USA relaxed the requirements for granting loans for the purchase of real estate at that time, which in part meant that people with no credit rating were accepted for mortgages on real estate.
As a result of the mortgages not being repaid, the US government approved a $1 trillion financial bailout package to rescue the large banks and restore the economy. Germany also supported the banks with almost 500 billion euros. The result: the United States, Germany, and many other industrialised countries slipped into a recession that no one had anticipated.
The consequences of Black Swan Events, such as the financial crisis of 2008, are significant and often last for several years. The end of such an event can be understood as the regeneration of the affected industries. A Black Swan is only considered to be over when the affected industry has fully recovered from the effects.
Sources
- Buhl, H.U. Der Beitrag der Wirtschaftsinformatik zur Früherkennung und Vermeidung von „Black Swans“ bei IT-Projekten. Wirtschaftsinformatik 54, 53–57 (2012).
https://doi.org/10.1007/s11576-012-0313-7
