South Africa: Shades of Grey - Understanding Grey Swans

analysis

Black swans are a well-known concept in financial markets. But it is perhaps their grey cousins that we should be paying more attention to. In this article we distinguish between the two types of swan and explain why we perhaps need to spend more time on the grey variety.

The concept of the black swan was made popular by Nassim Nicholas Taleb, who described it as an event which is unpredictable to the observer and which has major and far-reaching consequences.

The important feature of a black swan lies in the term "unpredictable to the observer". Standard prediction tools will not generally identify a black swan event in advance and hence it is virtually impossible to assign a probability to it.

The black swan event, however, becomes predictable in retrospect (the so-called hindsight bias), as the factors that precipitated the event become clear. This principle is best explained by using some examples:

The assassination of Archduke Franz Ferdinand, which kicked off World War 1 in 1914 (no one would have predicted the assassination, though its causes were well understood in the aftermath)

The fall of the Berlin Wall in 1989 (the event took the world by surprise, even though the...

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