Wednesday, March 16, 2011

Perspective: When is a Black Swan a Grey Swan?


By Grant de Graf

The Black Swan Theory or Theory of Black Swan Events is a metaphor that encapsulates the concept that the event is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight.

The theory was developed by Nassim Nicholas Taleb to explain:

1] The disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology

2] The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)

3] The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs

In recent years, natural disasters are occurring at a much more rapid rate and have moved beyond the boundaries of their normal levels of distributions. Events such as the earthquake in Christ Church, in Haiti and New Zealand, the Middle East crisis and the earthquake in Japan, are happening at unprecedented rates. Clearly, events that may have previously been termed as "black swan" need to be viewed in a different light, and reclassified as grey swan.

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