Black Swan Events

Black swan events UPSC: Relevance

• GS 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Black swan event RBI: Context

• Recently, RBI study has found that capital outflows of $100 billion (around Rs 7,80,000 crore) are likely to take place from India in a major global risk scenario or a black swan event.

Black swan event in India: Key points

• The report called for maintaining liquid reserves to deal with the event which is known as black swan.
• RBI has said that capital outflows, particularly, portfolio flows are driven by global risk aversion and they are sensitive to shifts in risk sentiment globally.
• So, if there is an adverse event like “Covid-type contraction in real GDP growth” or “global financial crisis type decline in interest rate differentials”, India could see capital outflows to the tune of 3.2% of GDP or approximately $100 billion.

What is a black swan event?

• Black swan event meaning: A black swan is a rare, unpredictable event that comes as a surprise and has a significant impact on society or the world.
• Three distinguishing characteristics – extremely rare and outside the realm of regular expectations; impact severely after they hit; and seem probable in hindsight when plausible explanations appear.

Origin of the term black swan event

• Black Swan theory was put forward by Nassim Nicholas Taleb, author and investor, in 2001.
• It was later popularised as a book where he does not try to lay out a method to predict such events, but instead stresses on building “robustness” in systems and strategies to deal with black swan occurrences and withstand their impact.
• The term black swan is linked with the discovery of black swans.
• Europeans believed all swans to be white until 1697, when a Dutch explorer spotted the first black swan in Australia.
• The metaphor ‘black swan event’ is derived from this unprecedented spotting from the 17th century, and how it influenced the West’s understanding of swans.

Black swan events in the past

• 2008 global financial crisis was a black swan event that was triggered by a sudden crash in the booming housing market in the US.
• The fall of the Soviet Union, the terrorist attack in the US on September 11, 2001, also fall in the same category.

Was COVID a black swan event?

• Many experts argue that COVID was a black swan event. Taleb, however, does not agree. He called it a “white swan” event, as he believes it was predictable, and there was no excuse for companies and governments not to be prepared for something like this.

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