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‘White Swan’ and ‘Black Swan’ Events

Feb 15, 2024

Today, we’re exploring a fascinating topic that has attracted a lot of attention in financial circles: the concept of Black Swan and White Swan events. Our discussion and English class today was inspired by a recent Bloomberg article from January 30th titled, “A ‘White Swan’ May Be Coming for the US.”

So, to understand the term ‘white swan’, let’s look at the opposite: a black swan. First, let me digress. A swan is a beautiful bird that swims in the water. White swans are very common, but you don’t believe a black swan exists until you see one for yourself. The term Black Swan was popularized by Nassim Nicholas Taleb, a renowned professor, economist, and writer. Taleb initially introduced this concept to describe highly improbable events with massive implications in financial markets and later broadened its application to encompass historical, scientific, and other significant occurrences. Nobody sees the coming, and when they do, people say ‘oh, why didn’t we see this coming?’

Black Swan events share three key characteristics:

  1. Rarity: These events are beyond the realm of normal expectations because nothing in the past can convincingly predict their occurrence.
  2. Extreme Impact: Their effects are profound and far-reaching.
  3. Retrospective Predictability: In hindsight, and that means to look back and reflect on past events,  humans tend to invent explanations for these events when they happen, making them appear predictable.

Examples of Black Swan events include the 9/11 attacks, the 2008 financial crisis, and the COVID-19 pandemic. Each of these events was unexpected, had a monumental impact, and was only clearly understood after it happened.

Conversely, Taleb has recently shifted focus from the economic ‘black swans’ to what he calls White Swan events. Unlike their Black counterparts, White Swans are not about rarity or unpredictability but about highly probable risks with foreseeable impacts. The Bloomberg article highlights a specific White Swan event looming over the United States, and when I say ‘looming over’, I mean something close and in some ways threatening: the federal budget deficit in the US. According to Taleb, and echoed by economic experts like former US Treasury Secretary Robert Rubin and BlackRock Vice Chairman Philipp Hildebrand, the deficit in the U.S. is swelling to such an extent – swelling, to expand’, that avoiding the fallout would require a miracle. They warn of a debt spiral, a situation where debt grows uncontrollably.

Here is an idiomatic expression that captures the essence of our topic: “to see the writing on the wall.” It means to recognize the signs or warnings that something bad will happen or is happening. That doesn’t mean that it will, but it is a ‘looming’ threat. So, regarding the US budget deficit and the risk of a White Swan event, it seems clear that some economists, like Taleb, see the writing on the wall but question whether corrective action will be taken in time.

In wrapping up, let’s revisit our key vocabulary:

  • Black Swan: Unpredictable, rare events with widespread impact, initially unrecognized but later rationalized as foreseeable.
  • White Swan: Potential risks that are likely and predictable, with significant, foreseen consequences.
  • Spiral: A situation that continuously worsens, becoming increasingly difficult to control.
  • Swelling: An increase in size or volume, often used to describe growing financial deficits.
  • To see the writing on the wall: To recognize impending danger or misfortune.

Thank you for tuning in to English for Economists. Join us next time as we continue to decode the language of economics, making it accessible and engaging for non-native English speakers. Until then, keep practicing. Goodbye for now!

Photo: Wiki Commons Ankit Kadam

 

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