What is a black swan event?

A ‘black swan’ occurs when a truly unexpected event comes in contact with the business-oriented desire to scrutinise a crisis – how it started, who is to blame, and how to avoid it happening again. 

Given their fickle nature, you should always expect some debate over which incidents qualify as black swans and which do not.

It is an adverse event in business with three crucial qualities:

1. It was impossible or near impossible to predict. 
2. Its impact is wide-reaching and severe; some definitions even use the term “catastrophic”. Usually, it has massive ramifications for a company or broader industry. 
3. After it is over, stakeholders will begin to argue that the event was predictable, primarily because they benefit from hindsight. 

In black swan cases, human judgement is fuelled by this hindsight rather than rational thinking. 

Stakeholders know how significant an event’s impact is, so they analyse every detail, identifying anything that could be considered a “warning sign” and placing undue importance on it, rationalising the entire ordeal as predictable when it was not.

Because of their scale, you’re likely familiar with these already:

• The dissolution of the Soviet Union 
• The dot-com bubble of the late 1990s. 
• The September 11th attacks
• The US property crash in 2008 that sparked the global financial crisis

The man who coined the term “black swan event” in a business context – Nassim Nicholas Taleb – has listed the four above as examples. 

All had devastating economic impacts in at least some parts of the world. All could not have been reasonably predicted. And all have been scrutinised since, sometimes excessively.

There is no universal definition system, only case-by-case analysis, which can prompt disagreement. 

For example, some sources say the COVID-19 pandemic is a black swan event; others do not. They argue that the world had known about such a pandemic for decades, so preparations could have been made.

In a business context, the most common impacts are:

• Severe turmoil in the stock markets
• Mass inflation pushes prices up so much that companies risk their economic viability.
• A significant change in investment patterns. 
• Major financial losses for business across an entire industry, region or even globally.

They are called “black swan events” for a reason, and tactics used to prepare for other setbacks don’t apply here. As teams dedicated to strategy and shareholders, boards won’t want to hear this. 

But, sadly, black swan events will remain largely unpredictable. It is not prudent to act as if they don’t exist, nor is it prudent to act as if one is imminent. Both will have negative consequences for companies. 

The only promise lies in adopting a mildly defensive approach in the hope that your business doesn’t become a terminal victim of whatever occurs.

You should be aware that investors and other stakeholders, in their constant drive to stay informed on risk, will be wary of one occurring. Because of that, it’s essential to think like them in this context. 

If they become spooked by the belief that one is about to occur, you should know about it. You should use your influence to calm their fears or prepare for them to pull out, whichever seems more likely at any given point. 

Additionally, you should also ensure your company’s strategy doesn’t leave it especially susceptible to a black-swan-style fallout. No one can future-proof a company for a black swan event, but they can make it especially vulnerable to one through negligence and poor business decisions.

Black swans are mainly unpredictable, catastrophic events that hindsight incorrectly claims to have been predictable or avoidable. 

There is no avoiding them, but boards should know that they exist. They don’t want to be caught off guard when one begins.