'Black Swan' is not a cliché for any bad thing that surprises us

On the 11th of March 2020, the World Health Organization declared Covid-19 (‘Coronavirus’, or ‘the virus’) a pandemic. It is without a doubt that the pandemic caused a lot of financial strain in the world with various economies implementing infrastructure development plans in order to recover their economy from the devastating effects of the virus. Since the declaration of the virus has a pandemic, various institutions including Investec and Deloitte released publications referring to the pandemic as a Black Swan event. Below, is why Covid-19 is not a Black Swan event.

Before we explore the reasons why the pandemic is not a Black Swan event, it is useful to define Black Swan. Nassim Taleb is a professor, statistician, former options trader and the author that coined the term 'Black Swan' in his book The Black Swan: The Impact of the Highly Improbable. A Black Swan even is loosely known as the occurrence of a highly improbable event. More formally though, in his book, Taleb explains how an event can come to being labelled a Black Swan:

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 (unlike the bird). Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. (Taleb, 2010, p. Prologue)

In summary, the Black Swan classification is made up of its rarity, the severity of the impact (must be extreme), and its predictability. Let’s go into this a little more…

First, it is an outlier, as it lies outside the realm of regular expectations. The Coronavirus outbreak was somewhat unexpected, however, to be classified as an event that lies outside the realm of regular expectations as well as an outlier, is off. We need to know just how much of a surprise the outbreak is.

We can look at this as the fable of the boiling frog; a frog is placed in cold water and the frog remains in the water as long as the temperature is comfortable for it, as the water temperature is increased the frog still remains in the water until it meets its doom. The World Economic Forum highlights that although frogs do not behave this way in real life, humans often do (2019, p. 5). What this means is that numerous warning signals were raised in the years leading to the COVID-19 outbreak, researchers and scientists pleaded with policymakers to better prepare their countries for an infectious disease outbreak to no avail.

Research papers throughout the years have found that the risk of infectious disease outbreaks is gradually increasing , further, in a single lifetime we have experienced outbreaks such as SARS, MERS and Ebola which have all had deadly consequences albeit not to the extent of the coronavirus. In other words, the outbreak was not an outlier just as Ebola was not an outlier, further, medical scientists and statisticians alike found that the likelihood of a virus outbreak was paramount.

This leans to the theory of Known, Unknown and Unknowable (“KuU”) risks. Diebold, et al. describe Unknown risks as those whose extent and full implications remain unclear while, unknowable risks include all risks that cannot be identified in advance and no probabilities can be specified for some or all events and no realistic boundaries can be stated for the consequences (2010, pp. 43-44). In the context of COVID-19, the Unknown, or main uncertainty that existed was when the outbreak would occur and the unknowable uncertainty rested in how the outbreak would present itself and the extent thereof, but what was known, is that there is an increase in the likelihood of an infectious outbreak. As such, the first condition one has not been met.

Second, it carries an extreme impact. On the 8th of July 2021, well into the Third wave, South Africa had 2.18 million confirmed cases while globally, the word is at 185 million (Ritchie, et al., 2021). There is no doubt that the impact of the outbreak is large, extreme and severe. India, for example, grew its economy over thirty years and lifted 300 million inhabitants from the poverty line however, the virus unravelled this progress in a matter of months with about 100 million having lost jobs and gone back to earning less than $5 a day (Azim Premji University, 2021, p. 20). In terms of the second criteria for Black Swan classification, Covid-19 meets the standard.

Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. The third criteria speaks to the normalisation of the pandemic, however, we have seen that research conducted in recent years has suggested that a pandemic was looming, what this means is that the idea of the outbreak had been normalised by medial scientists involved in infectious disease research thus, explanations were not suddenly concocted to explain away the reasons of the occurrence, the explanations were already in existence. Covid-19 does not meet the third criteria.

An article by The New Yorker speaks of Taleb’s irritation whenever the Coronavirus pandemic is referred to as a ‘Black Swan’ (Avishai, 2020). Taleb explains that the term Black Swan is not meant to be used to provide “a cliché for any bad thing that surprises us” instead, we should delve into the criteria set in defining Black Swan and apply this criteria critically before we use it to describe a risk event, that’s what we have done in the above.

Footnotes

[1] For the Investec paper, please refer to https://www.investec.com/en_za/focus/growth/taming-the-swan.html

For the Deloitte paper, please refer to https://www2.deloitte.com/za/en/pages/about-deloitte/articles/a-black-swan-event-for-the-semiconductor-industry-covid-19.html

For Forbes’ paper, please refer to https://www.forbes.com/sites/forbesbooksauthors/2020/03/19/covid-19-is-a-black-swan/?sh=794e244c7b4b

[2] Refer to Appendix

Appendix

Number of countries experiencing significant disease outbreaks, 1995-2018

Source: Harvard Global Health Institute/World Economic Forum analysis of data from WHO Disease Outbreak News (http://www.who.int/csr/don/en/)

References

Avishai, B., 2020. The pandemic isn't a Black Swan but a portent of a more fragile global system. [Online]

Available at: https://www.newyorker.com/news/daily-comment/the-pandemic-isnt-a-black-swan-but-a-portent-of-a-more-fragile-global-system

[Accessed 11 July 2021].

Azim Premji University, 2021. State of Working India 2021: One year of Covid-19, Sarjapura: Azim Premji University.

Diebold, X. F., Doherty, A. N. & Herring, J. R., 2010. The Known, the Unknown, and the Unknowable in Financial Risk Management. 1st ed. New Jersey: Princeton University Press.

Hull, J. C., 2018. Risk Management and Financial Institutions. 5th ed. Hoboken: Wiley & Sons, Inc.

Ritchie, H. et al., 2021. Coronavirus Pandemic (COVID-19) – the data. [Online]

Available at: https://ourworldindata.org/coronavirus-data

[Accessed 11 July 2021].

Taleb, N. N., 2010. The Black Swan: The Impact of the Highly Improbable. 2nd ed. New York: Random House Trade Paperbacks.

World Economic Forum, Harvard Global Health Institute, 2019. Outbreak Readiness and Business Impact: Protecting Lives and Livelihoods across the Global Economy, Geneva: World Economic Forum.