Understanding the Unpredictable – Black Swan Events

Without sounding trite, Covid-19 is such a bummer. It has caused people to lose loved ones, will have lasting effects on the economy, and has impacted people and families in ways they never imagined possible. While I try to limit my news intake because it feels like constant doom-and-gloom, there are some terms and themes that seem to be repeated over and over when it comes to discussions about the economy.

If you’re not well versed in these terms, you may be feeling intimidated and overwhelmed. In this blog post, let’s discuss how Covid-19 has become the event that has caused such negative impacts on the economy.

The Basics:

The Black Swan Theory was developed by Nassim Nicholas Taleb. In fact, he wrote a whole book called The Black Swan. It is a term that is used to describe rare, unexpected events of large magnitude which become a significant piece of history. These events can be positive or negative – examples can be anything from the rise of the internet and personal computers, to world wars.

The Economic Principle:

The general definition of a black swan event has three components:

1. It comes as a surprise
2. It has a significant impact
3. It is often rationalized after the fact, with the benefit of hindsight

What’s up with the term Black Swan?

I did the googling for you on this one: the phrase was coined by the 2^nd century Roman poet Juvenal. In his Satire VI, he described something as “a rare bird in the lands and very much like a black swan”. Essentially, black swans were thought not to exist. Lo and behold, they do exist, though they are rare. The largest population is in Australia and you can read about them here, if you care to delve deeper.

How is Covid-19 a Black Swan for the Economy Right Now?

This economic meltdown started with a commitment to lock-down for two weeks to “flatten the curve”. After this two-week period, the various states in the US chose their own forms of continuing the lock-downs for some period of time, some of which have since opened up, while others remain in lock-down mode.

These lock-downs have led to school closures, business closures, and regulations that make it nearly impossible for certain types of businesses (think concert venues, etc) to comply with various social distancing and health mandates. Because of this, people have lost businesses, jobs, and have had to quit their jobs in order to care for their children, who may not be able to attend school in person.

With people unable to earn money, they have been unable to pay rent, pay mortgages, or they may no longer be able to support themselves or their families. The levels of desperation are rippling through the economy and will create a lasting impact. Consider the family that lost a business, then lost their home. They may never be able to pay for their kids to attend college, impacting two generations of a family in one fell swoop.

So, does Covid-19 check all of the boxes for a Black Swan Event? Certainly does. Here’s how: