Being involved in risk management and risk tools every day, it looks kind of weird that things can happen such as a credit crisis. Nothing was new about the credit crisis. In the last two centuries numerous events occurred where a financial crisis was born. Why is it that with all the tools and knowledge we were not able to prevent it? These events are referred to as Black Swan events.
This theory from Nassim Nicholas Taleb refers to the fact that the term black swan was a Latin expression. Its oldest reference is in the poet Juvenal expression that “a good person is as rare as a black swan” (“rara avis in terris nigroque simillima cygno”. It was a common expression in 16th century London as a statement that describes impossibility.
Well you probably already guessed it, they did find Black Swans in Western Australia not much later. Showing that nothing is impossible and although rare it can happen. The regular probability has almost nothing to do with it.
The Turkey
My favorite story is the chance that a Turkey got fed. From his birth the turkey gets food. Everyday the probability is higher as the amount of days before brought all some good food. When the probability is the highest. It becomes Christmas and you can guess it already, because at Christmas is there no food for the turkey.
Black Swan events will occur and our current risk management tools like Value at Risk in Agiblocks deal with the day to day risk. Having these tools should not give us a false feeling of safety. Always look for the Black Swan and our challenge is to find it also in your environment and provide the tools to manage them.
As Taleb would put it: It does not matter how frequently something succeeds if failure is too costly to bear.
