Black Swans and other strange creatures

This article was written as an aside, but has been included as a part of my book, Credit Intelligence and Modelling: Many Paths through the Forest of Credit Rating and Scoring, which has been accepted for publication by Oxford University Press and was published in early 2022

‘… rara avis in terris nigroque simillima cygno’ (‘a rare bird upon the earth, like a black swan’).?Decimus Iunius Iuvenalis (Juvenal), a Roman poet in the early 2nd century, in Satires, VI. 165.

Some people may not care about the labels being bandied about regarding Covid-19, but I find it fascinating how humans go about assigning them—especially those associated with animals or things totally unrelated. At times, we come up with terms that are misnomers, like 'metadata', which has been used to describe data about data that does not exist (e.g. call data records, the calls are not recorded, no data exists, it vanished into the ether), that would be better called 'dialogosdata' (conversation data), which could be shortened to 'diadata' or 'logdata'. In any event, that is a side rant, totally off-topic.

As for the current one... In recent years several risk-related animal metaphors have emerged.?One with ancient roots is the ‘black swan’.?In Roman times, black swans were thought not to exist (as evidenced by the Juvenal quote above) but were found in Western Australia in 1697.?Thereafter, it became associated with rarity.?Taleb [2010] defined black swans as events i) unforeseen or thought impossible, ii) with a major impact; iii) that is rationalised in hindsight as having been foreseeable.?His examples included World War I, the collapse of the Soviet Union, the Internet and personal computer, the 9/11 terrorist attack.??

During her European tour of 1771, Elizabeth Seymour Percy, the Duchess of Northumberland, berated the women’s apparel at Bonn’s court in her travel journal, stating, “If dre?s is not carried to a great height at Bonn, intriguing is, in?omuch that a virtuous woman is almo?t as rare as a black ?wan”, followed by further comments even less flattering and not re-publishable (i.e., they have been censored by higher authorities; I mean, it was really b**chy, but probably true).

To my mind, black swans are Rumsfeld’s “unknown unknowns”, yet that term has been readily and eagerly applied to “known unknowns”.?Taleb suggested that whether or not something is a black swan depends upon the observer—Thanksgiving is a black swan for the turkey, not the butcher.?Another view is that black swans can result from failed intelligence.?Since 2010, the list of strange creatures associated with known-unknowns has increased, with some being swans of different colours or hygiene levels.

Dirty white swan—an event that surprises only because warning signs were ignored or past events dismissed {1997 Asian financial crisis, 2005 New Orleans flooding}.?Claudia Zeisberger & David Munro [2010] argued against labelling the 2007 financial crisis a black swan.

Black turkey—like the above, an event consistent with past events that nobody thought would happen.?Laurence Siegel [2010] proposed it for the Great Recession.

Red Swan— Gordon Woo [2012:322] describes these as “plausible, attractive, perhaps supported by limited circumstantial evidence, albiet of questionable reliability’, i.e. the event does not happen or outcomes are not as severe as expected {Y2K, Mad Cow decease deaths}.?He argued that Taleb’s swan would become an an excuse for ignoring or failing to prepare for a known but rare risk.?

Woo borrowed from an Algonquin legend involving a red swan whose “plumage glittered in the sun” that was wounded by an arrow and flew into the sunset (Longfellow [1855] also used it in his Song of Hiawatha).?Woo also associated it with Indian lore regarding Mount St Helens, but no confirmation can be found.

Gray rhino—a neglected event, so-called because it is “obvious, visible, coming right at you, with large potential impact and highly probable consequences”.?Michele Wucker [2016] coined it in 2013 Davos, also regarding the financial crisis of 2008, which she blamed on short-term thinking (she also used it as the title for her 2016 book).?

Black elephant—a cross between a black swan and ‘elephant in the room’—an obvious and significant threat that nobody wishes to deal with (‘the evil spawn of our cognitive biases’) and pretend, and then treat it like a black swan when it happens?{Post-Brexit UK, Covid-19}.?Peter Ho [2017] argued that governments must be better at dealing with complexity and do scenario planning.

Green swan—a climate event outside of the expected range with far reaching consequences. These differ from black swans in that there is some certainty that they will occur. This was an obviously play on black swans proposed in John Elkington [2020]. It has since become the title theme of successive conferences hosted by the Bank for International Settlements.?

Other, older, animal analogies are used.?One is the ‘butterfly effect’—whereby a butterflies’ flapping of wings could cause a typhoon in Asia.?The term was coined in Ray Bradbury’s [1952] short-story, Sound of Thunder, and has been adopted in chaos theory to indicate minor events that can affect history.?Another is the ‘boiling frog’, whereby if water is heated slowly the frog will not jump out and die (contrary to a belief once held).?That applies to the human response to climate change; as we become more accustomed to extreme weather and temperatures, it seems ever more normal.?And another, the ‘red herring’, which leads one down a fruitless path of questioning, usually away from the truth.?It stems from William Cobbett’s Political Register [1807-02-14:232-3] reminiscing about having used overly-smoked kippers as a boy to mislead hounds on the trail;?he then presented fellow journalists as hounds chasing stories about Napoleon to direct public attention away from domestic issues.??

It is very difficult to plan for rare events with significant negative consequence.?At the time of writing (April 2020) the COVID-19 epidemic is underway, and we are in lockdown to prevent further transmission to limit the damage.?Unknowns are the influence of the seasons and potential adaptations to people’s immune systems.?Also unknown are i) how it will play out in terms of business failures, job losses, deaths due to hunger; and ii) the mitigating influence of payment holidays, small business support, governmental liquidity injections, &c.?We rely on models and analytical mechanisms built both in and for stable environments, and all will likely have to be revisited once a new normal is established.??This applies not only to those used for operational decision making; but, also for capital allocation and accounting loss provisioning.?Many models focus on economic cycles, but one wonders whether or how these rare events—which will become part of our institutional memories—will be accommodated.??

PANDEMICS in HISTORY

In 2018 the World Health Organisation presented a known unknown scenario involving a hypothetical undiscovered Disease X, after outbreaks of Ebola, Zika, and SARS; COVID-19?fits the description.?Pandemics are not black swan events.?They tend to occur with fairly regular frequency—what varies is the disease, means of transmission {airborne, sexual, water/food, flea, mosquito, etc.}, adaptations to people’s immune systems and seasons, and resulting deaths (years and fatalities in brackets). COVID-19 is airborne, like the Russian flu (1889/90—1mn), Spanish flu (1918/9—20-50mn), Asian flu (’56-58—2mn), Hong Kong flu (’68—1mn).?Smallpox and measles are also airborne, one of which is thought to have caused the Antonine Plague (165—5mn); they both contributed to massive deaths of indigenous Americans once introduced by Europeans from the 16th century.?HIV/AIDs is the only major sexually transmitted disease (1981-2012—36mn) and has not abated.?Cholera is transmitted via contaminated water and food, the worst pandemics being the Third (1852-60—1mn) and Sixth (1910-11—800K).?The bubonic plague (rat-/flea-borne) still retains top position though, especially when deaths are measured as a percentage of the then population (40 to 75 percent), which occurred during the Plague of Justinian (541-42—25mn) and the Black Death (1346-53—75-200mn). ?Malaria has also resulted in epidemics, but does not feature in the top 20; tuberculosis is considered a pandemic, but with no concentrated outbreaks over time.?Notably, the Covid-19 recession is the first major recession in the last 500 years that can be attributed solely a pandemic.?The Spanish flu exacerbated the recession of 1920–21; but, was not the main cause.

REFERENCES

Elkington, John [2020] Green Swans: The Coming Boom In Regenerative Capitalism. Austin TX: Greenleaf Book Group.

Ho, Peter [2017-04-07]?‘The black elephant challenge for governments’.?The Straits Times, Singapore.

Sarma, E A S [2012] 'The black swan, the white lies and the red herring: The story of nuclear power retold'. DiaNuke.org www.dianuke.org/the-black-swan-the-white-lies-and-the-red-herring-the-story-of-nuclear-power-retold/

MPHonline [Undated] OUTBreak: 10 of the Worst Pandemics in History. viewed 2020-04-16.?

Siegel, Laurence B [2010]?Black Swan or Black Turkey? The State of Economic Knowledge and the Crash of 2007–2009.?Financial Analysis Journal 66(4):6-10.?DOI:10.2469/faj.v66.n4.4

Woo, Gordon [2012]?Calculating Catastrophe.?Imperial College Press.??

Wucker, Michele [2016] The Gray Rhino:?How to Recognize and Act on the Obvious Dangers we Ignore.?St. Martin’s Press.???

Zeisberger, Claudia & Munro, David [2010-05-25]?Dirty White Swans: Could Unexpected Extreme Events Put You Out of Business.?INSEAD Publishing.