Context
In a Reserve Bank of India paper, the authors allude to the risk of black swan event, saying that it may lead to outflows of Rs 7.8 trillion from India.
What is the theory of black swan event?
- A black swan is a rare, unpredictable event that comes as a surprise and has a significant impact on society or the world.
- The theory of black swan was first floated by finance professor and former Wall Street trader Nassim Nicholas Taleb in 2001.
- Taleb went on to write a book on it titled, 'The Black Swan: The Impact of the Highly Improbable'.
- In his book, Taleb says that there are three attributes of the event.
- The first is that it is an outlier and cannot be predicted.
- The second is that it has an extreme impact.
- The third is human nature to try to concoct explanations once it has happened.
- It can be characterized by a combination of all adverse shocks experienced in history coming together, leading to a perfect storm.
Recent examples of black swan events
- A severe global economic crisis (the sudden collapse of the US housing market)
- The 26/11 terrorist attacks
- The burst of the dot.com bubble in the 1990s
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