What is a black swan?

A “black swan” is an event that has a very low probability of occurring and when it occurs will create catastrophic consequences. Black swans are scary for every economy, especially in stocks and cryptocurrencies. So what is a black swan, and how did black swan events in history take place? Please see the detailed information below.

***The theory of black swan in English is Black Swan Theory.

In the past, people thought that there were only white swans on earth, not black swans. The white swan is representative of beauty and nobility. However, later in 1697, a Dutch explorer named Willem de Vlamingh discovered that black swans really existed when he arrived in Australia.

This has changed people's perception, but because black swans are rare animals, a professor at New York University named Nassim Nicholas Taleb took Black Swan as the name for his book. is: The Black Swan: The Impact of the Highly Improbable, roughly translated Black Swan: The impact of the highly unlikely.

This professor described a black swan event as having three characteristics:

- Very difficult to predict: their likelihood of occurrence is outside the range of normal predictions.

- Causes serious consequences: has a major impact on the economy, finance or even politics

- Retrospective predictability: We will often find clear explanations for a black swan event after it happens and can find ways to prevent it in the future.

How do Black Swan events work?

The general premise of black swan theory is that unpredictable events can have severe consequences for financial markets or the economy. Importantly, events can be unpredictable due to the accumulation of similar and repeated experiences.

According to Taleb, the black swan problem in its original form is:

How can we know the future with our knowledge of the past?

In other words, how can we draw general conclusions from our specific experiences when we haven't experienced them all? Just because we only see white swans doesn't mean black, pink or any other colored ones don't exist.

Taleb illustrates this overreliance on past experience with the example of a turkey raised for Thanksgiving. Throughout the turkey's life, it is fed daily, creating the expectation that it will, in fact, be fed the next day. Each day the turkey is fed, its faith is strengthened until Thanksgiving day when it will “have to reconsider its faith.”

This is a simple and straightforward illustration of the black swan phenomenon. When we continue to experience the same thing, such as only seeing white swans or being fed every day, we tend to believe that will be our experience in the future.

=> Sometimes it takes a different and unexpected experience to change established beliefs.

Black Swan events have happened in finance and stocks

1. The Dotcom Bubble of 2001

The stock market rose to all-time highs in the late 90s and early 2000s due to overvalued and over-hyped technology companies. With 3 characteristics of the black swan event shown in the Dotcom bubble in 2001 such as:

+ Surprise: Investors poured money into tech companies in the mid-to-late 90s, sending tech stocks to record highs and creating an overvalued bubble. The high valuation was overlooked because investors were convinced that the internet was doing things differently this time around. The high level of investment demonstrates that people did not expect the technology sector to see such a large drop in value.

+ Significant economic impact: On Monday, March 13, 2002, the bubble burst and the Nasdaq dropped 78.4% as of October 2002, which also led to job losses. jobs due to the shrinking technology sector when up to 17.8% of workers in the technology sector were unemployed in 2004.

+Retrospective predictability: Since the bubble burst, people have blamed irrational investors for driving up prices, high availability of venture capital, or the Federal Reserve's use of monetary policy currency to slow the economy.

2. Economic crisis in 2008

The subprime mortgage crisis that began in 2008 is also known as the Great Recession, referred to as one of the worst economic periods in American and world history since the Great Depression. 1930.

The 2008 economic crisis demonstrated all three characteristics of a black swan:

+ What a surprise: Economic policymakers, especially at the US Federal Reserve (FED), largely did not expect the subprime mortgage crisis. In fact, Alan Greenspan, chairman of the Federal Reserve at the time, later said in an interview with David Rubenstein that:

You cannot have a crisis of such an unsurprising nature.

+ Significant economic impact: Unemployment doubled during the Great Recession, peaking at 10%. There were also nearly 3.8 million homes foreclosed from 2007 to 2010, investment bank Lehman Brothers had to file for bankruptcy and 25,000 people lost their jobs.

+ Retrospective prediction ability: The Great Recession has been studied and discussed at length. It is now clear to most economists and even interested casual observers that lax lending policies in the subprime market were the primary cause of the 2008 mortgage crisis. These policies include lending more to less creditworthy borrowers than they can repay, often with adjustable-rate mortgages, and securitizing those loans for resale. under increasingly overlapping agreements.

3. Black swan event - Flash Crash in 2010

Flash Crash is the word used to describe a flash crash, meaning a sudden and sharp drop in stock prices. This black swan event occurred in 2010, caused by a British futures trader named Navinder Sarao manipulating automated trading algorithms.

The characteristics of this black swan event are:

+ Element of surprise: There was no plan for Flash Crash. It was an unexpected event and no one expected it.

+Significant impact on the economy: The stock market lost nearly 1 trillion USD in just one day. Flash Crash also pushed for stricter regulation of trading activity, specifically the establishment of “circuit breakers,” which halt trading when stock prices exceed certain limits within established time frames.

+ Retrospective forecasting ability: Sarao manipulated the market in his favor by mimicking demand with “fake orders” and causing problems.

4. Black swan incident in the cryptocurrency market

Black swans in the virtual currency (crypto) market in 2022 can include the following incidents:

+ The collapse of the Terra ecosystem in May 2022 caused the cryptocurrency market to lose hundreds of billions of dollars in just a few short days. Bitcoin price also fell from 39,000 USD to 29,000 USD.

+ Celsius Crypto Bank announced that it would stop allowing customers to withdraw money and then went bankrupt in the surprise of the cryptocurrency community, which is also one of the notable black swan incidents. This caused the cryptocurrency market to fall into crisis again when Bitcoin price fell from 28,000 USD to only 19,000 USD in just 1 week.

+ Most recently, the rapid collapse of the FTX cryptocurrency exchange - once the world's No. 2 virtual currency exchange after Binance - is also considered a black swan event in cryptocurrency. This made billions of dollars of investors' money on FTX unable to withdraw and caused the price of Bitcoin and the cryptocurrency market to plummet, specifically the price of Bitcoin fell from 21,000 USD to only 15,000 USD.

What do investors need to do to reduce the risk of future black swan events?

From the concepts, characteristics and occurrences of black swan events in the past, it can be seen that in the future black swan incidents will definitely take place, we just don't know when and where. So, if investors want to reduce losses before a black swan event, they can take measures such as:

- Diversify investments: not just stocks but gold, real estate, coins, for example

- Appropriate asset allocation: don't put all your eggs in one basket. For example, if you have savings, you should divide them into different banks. Or when opening a cryptocurrency trading account, you should not leave all your money on a single exchange but on several different exchanges.

- Take advantage of black swan opportunities: black swan incidents often cause the value of a certain asset to fall very sharply, if you know how to take advantage of this opportunity to buy shares of good or forecast companies. Any project with potential can earn large profits after the market recovers.

- Always be mentally prepared that a black swan will definitely happen, prepare for the worst cases.

Source: Dautuio

The “black swan” effect will still be there. Anything that can happen will happen. Therefore, letting something impossible happen when it can happen is impossible. Maybe the way we do that is to minimize the probability of that happening.

You can read more about the Black Swan Theory at the wiki

https://vi.wikipedia.org/wiki/L%C3%BD_thuy%E1%BA%BFt_thi%C3%AAn_nga_%C4%91en