Handling Life's Black Swan Events

Sujatha Rao encourages us to be prepared for unexpected events in our lives by making the most of opportunities or reserves while they are available

Up until 1697, human beings believed all swans to be white. But then some Dutch explorers spotted a few black swans in Western Australia and, suddenly, human beings woke up to the reality of the existence of black swans. When we come to think of it, statistically, all it takes is the sighting of one black swan to prove that black swans do exist.

Since then, the term 'black swan theory' came to be used as a metaphor for describing an occurrence that is rare and unpredictable but has a catastrophic impact.

Nassim Nicholas Taleb popularised this theory in his famous book The Black Swan. According to Taleb, to be classified as a black swan event, it should meet the following three criteria: It should be an outlier, lying outside the realm of the regular, expected happenings.

It should lead to an extreme impact. Despite its outlier status, in hindsight, it's explained to be an event that could have been predicted.

Both the world wars, the 9/11 terrorist attacks, and the 2008 financial crisis are some examples of black swan events that fit into all the three attributes described above. The recent pandemic is not considered to be one by researchers as they found that there is a one per cent probability of pandemics of some intensity occurring, making them not that rare after all.

Such black swan incidents show that we cannot assume the absence of evidence to be equal to the evidence of absence. This theory has been very beautifully put into words by Donald Rumsfeld in the following quote:

There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know. But there are also unknown unknowns-the ones we don't know we don't know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.