No, COVID-19 is not a Black Swan event*
*Unless you’re a turkey
It’s really a White Ostrich event
There’s a special kind of history re-writing going on right now among some financial analysts, risk managers, C-level leadership, politicians and anyone else responsible for forecasting and preparing for major business, societal and economic disruptions. We’re about 3 months into the COVID-19 outbreak and people are starting to declare this a “Black Swan” event. Not only is “Black Swan” a generally bad and misused metaphor, the current pandemic also doesn’t fit the definition. I think it’s a case of CYA.
Just a few of many examples:
Marketwatch quoted an advisory firm founder stating the stock market fall is a “black swan market drop.”
The Nation predicted on February 25, 2020 that “The Coronavirus Could Be the Black Swan of 2020.”
Forbes declared on March 19, 2020: COVID-19 is a Black Swan.
My LinkedIn and Twitter feed is filled with Black Swan declarations or predictions that the coming economic ramifications will be Black Swan events.
None of this is a Black Swan event. COVID-19, medical supply shortages, economic disaster – none of it.
Breaking Black Swans down
The term “Black Swan” became part of the business lexicon in 2007 with Nassim Taleb’s book titled The Black Swan: The Impact of the Highly Improbable. In it, Taleb describes a special kind of extreme, outlier event that comes as a complete surprise to the observer. The observer is so caught off-guard that rationalization starts to occur: they should have seen it all along.
According to Taleb, a Black Swan event has these 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.”
Let’s take the Black Swan definition and fit it to everything that’s going on now.
“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.”
COVID-19 and all of the fallout, deaths, the looming humanitarian crisis, economic disaster and everything in-between is the opposite of what Taleb described. In risk analysis, we use past incidents to help inform forecasting of future events. We know a lot about past pandemics, how they happen and what occurs when they do. We’ve had warnings and analysis that the world is unprepared for a global pandemic. What is looming should also be of no surprise: past pandemics often significantly alter economies. A 2019 pandemic loss assessment by the World Health Organization (WHO) feels very familiar as well as many recent threat assessments that show this was expected in the near-term future. Most medium and large companies have pandemic planning and response as part of their business continuity programs. In other words, past is prologue. Everything in the past convincingly points to the possibility of a global pandemic.
Perhaps the details of COVID-19’s origins may be a surprise to some, but the relevant information needed for risk managers, business leaders and politicians to become resilient and prepare for these events should be of absolutely no surprise. It’s true that when is not knowable, but that’s is the purpose of risk analysis. We don’t ignore high impact, low probability events.
“Second, it carries an extreme ‘impact’.”
This might be the only aspect of what we’re currently experiencing that fits the Black Swan definition, but extreme impact alone does not make the COVID-19 pandemic a Black Swan. The COVID-19 impact today is self-evident, and what’s to come is foreseeable.
“Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”
When a true Black Swan occurs, according to Taleb, observers start rationalizing: oh, we should have predicted it, signs were there all along, etc. Think about what this means – before the Black Swan event it’s unfathomable; after, it seems completely reasonable.
We are seeing the exact opposite now. The select folks who are outright calling this a Black Swan aren’t rationalizing that it should have or could have been predicted; they are now saying it was completely unpredictable. From POTUS saying the pandemic “snuck up on us,” to slow response from business, there’s some revisionist thinking going on.
I’m not sure why people are calling this a Black Swan. I suspect it’s a combination of misunderstanding what a Black Swan is, politicians playing CYA and fund managers trying to explain to their customers why their portfolios have lost so much value.
It’s a Black Swan to turkeys
“Uncertainty is a feature of the universe. Risk is in the eye of the beholder.”
-Sam Savage
Taleb explains in his book that Black Swans are observer-dependent. To explain this point, he tells the story of the Thanksgiving turkey in his book.
“Consider a turkey that is fed every day. Every single feeding will firm up the bird's belief that it is the general rule of life to be fed every day by friendly members of the human race 'looking out for its best interests,' as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.”
For the turkey, Thanksgiving is a Black Swan event. For the cook, it certainly is not. It’s possible that some are truly turkey politicians, risk managers and business executives in this global pandemic. However, I don’t think there are many. I think most happen to be a different kind of bird.
If the COVID-19 pandemic isn’t a Black Swan…
If the COVID-19 pandemic isn’t a Black Swan event, what is it? My friend and fellow risk analyst Jack Whitsitt coined phrase White Ostrich and had this to say:
I like Taleb’s book. It’s a fascinating read on risk and risk philosophy, but the whole Black Swan metaphor is misused, overused and doesn’t make much sense outside the parameters that he sets. I’ve written about the bad metaphor problem the context of cyber risk. I also recommend reading Russell Thomas’s blog post on different colored swans. It will illuminate the issues and problems we face today.
