What is the meaning of a black swan event?

A black swan event is a highly improbable occurrence that is rare, high-impact, and unexpected. An event like this is followed by several catastrophic occurrences such as a market crash or a drop in global GDP value. And even though there are some predictive tools to increase preparedness against them, they are still mostly random.

Is FTX a black swan event?

Yes, the FTX meltdown was a black swan event; an an exchange valued at almost $16 billion turned to dust in a matter of days. Plus, the FTX collapse aligned with the traits of a black swan event, including the rarity, massive impact, and norm disruption with the scales shifting to self-custodial crypto ownership.

How does the black swan theory apply to investing?

A black swan event might not be an investing-specific occurrence. Instead, it can be a broad-scale event that might lead to investing-specific outcomes like the financial crisis of 2008 pushing the S&P index to the ground. Therefore, the black swan theory, in terms of investing, highlights the importance of reading the indicators and adhering to the right exit strategies to minimize losses.

Can black swan events be predicted?

As black swan events are rare and highly improbable, predicting them can be quite difficult. However, there are a few predictive strategies, such as heavy-tail distribution, bayesian analysis and stress tests, to help us better analyze past events and find possibilities surrounding the black swan event.

How do black swan events affect the economy?

Black swan events can affect the economy by first impacting the financial realms like the stock market and volatility index. Once that sets in, the economy starts experiencing financial losses, market disruptions, increased unemployment, lower or negative GDP levels, and even potential recession.

Why are black swan events important in risk management?

Black Swan events are important in risk management as they help you strategize for the worst possible scenario. Therefore, if you consider these events, it becomes easier to prepare the most robust risk management strategies that are primed to face the worst situations.