Black swan event
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Introduction
The current global pandemic, which is the coronavirus, has a wide range of effects. Its uncertainty affects all sectors of the economy as unpredictability affects the business world. The pandemic was neither anticipated and not predicted, and when its ends remain a mystery to many of us. The effects brought about by the pandemic are known as the black swan. The black swan is defined as an unpredictable event that is not what normal dictates and expects of a situation and has potentially great consequences (Aven, 2013). The events that fit this description have various characteristics, some of which include the extreme rarity, the severe impacts as well as the widespread effects which are rather obvious.
The black swan effect is a danger to the economy, and it can cause great damage to an economy as no one ever anticipated such an event. Since the damage cannot be anticipated in major cases, economies are therefore supposed to be flexible and one that is built for a prepared building system. Depending on potential economic or disaster focusing tools is no assurance that this form will work, and it may have other dire consequences as offering false hopes for the predictability of uncertainty, making an economy more vulnerable to black swan events as they had formerly bought into the false hopes of security. Coronavirus pandemic is our black swan, and it didn’t take long before the effects were felt all over the world. First cases were reported late last year, and it took three months to get that global scare, which has forced most countries into an unprecedented lockdown affecting their economies and putting their healthcare sector to test. Within a short time it took to spread, no known country could have potentially shielded itself from such effects that happened, and therefore every single economy is at risk.
Understanding the back-swan event will help us get a deeper understanding of the subject. The term was coined in the year 2007 by a finance professor by the name Nassim Nichola Taleb. Taleb argued that due to the unpredictable state of the black swan events, it’s rather utterly impossible to determine, it is is happening due to the rareness of the catastrophic activities and sequence. With this in mind, he further stated that its rather important that people should admit that the black swan event is a possibility, and they should be prepared for whatever it may be through proper planning (Nafday, 2011). A year later, the infamous 2008 financial crisis happened, and he argued that when a broken system is allowed to fail, it’s strengthened against the potential catastrophes that will arise from future black swan events that will happen.
According to Taleb, a black swan event is one that is son rare so uncommon that the thought that it might happen is unknown. This rule out a predictable event such as the weakening of currency or drops in the commodity process, which can be mathematically computed. A black swan effect should have a catastrophic impact when it occurs, and the effects can be explained in hindsight as if the catastrophe was predicted. Coronavirus was unpredictable, the effects arising from the pandemic are predictable, and it has a catastrophic effect on every sector affected by the virus. Some countermeasures such as lockdowns have reduced the spread but fueled the scale in terms of economic turmoil that a country is bound to experience as potential effects of the coronavirus.
Black swan events being extremely rare events, Taleb states that the standard and basic tools for probability and predictions, which include the normal distribution, have no application in such situations. They are not worth the application as the numbers affected by pandemics or financial crisis are extremely large; therefore getting the needed sample sizes are never available for making rare event definitions. The inability to predicts such events as well as the inconsequential happenings of such events makes the event less interesting, and therefore more often than not, countries and their economies tend to be less prepared as these characters discourage preparedness. Any system of government adopts a proactive approach and if not a reactive approach, we get to see that such systems will more often than not be dependent on past events and sequences, failing to have such patterns for black swan events means most of them will be taken by surprise when such happens.
Key aspects of the black swan events would mostly leave a country to speculate on how such an event could have been foreseen. Some key examples of the black swan events will help us understand the coronavirus pandemic and the effects. The 2008 housing market is the second most recent form of the black swan event. Its scare was worldwide, and its unpredictability took many a surprise as only a few outliers were able to predict the happening. The very same year, Zimbabwe was hit by the worst hyperinflation with a peak inflation rate of around 80 billion percent such inflation levels are very much unpredictable and with the effects could potentially ruin the country in terms of the finances.
One recent effect evident is the drop in oil prices. With the global lockdown happening, vehicles and industries happening are on the all-time low. This means that the demand for fuel has reduced while the supply increases. The largest consumers for oil have reduced their intake, and some cut their intake. Production has been on the all-time increase with increased competition between Arabian countries and Russia, which was aimed at countering the production of Arabian countries; therefore, the production was excess oil. The effects were surplus products, and the demand was low; the effects meant that prices had to fall below the required standards, and some had incurred the cost of storing the excess oil production.
Countries having economies that rely on oil, such as the United Arab Emirates, are facing an economic crisis. The Russians were very much prepared, and their economy wasn’t dependent on oil production, offering them a safety net. The effects caused to economies are just but the start of the major effects that will be attributed to the effects of the coronavirus. Currently, the economies affected by this shift are those that are reliant on oil as a major factor and influencer of their economies. We get to see that the corona pandemic has qualified to be regarded as a black swan event, basically because it was unpredictable, and the effects can be told apart as one can predict the potential effects of the virus. The lesson that can be learned from this approach is that there is a need to adopt economies that are diverse; they shouldn’t be tied to one activity which, when the shift happens, will affect them greatly. The matter must be addressed proactively as we get to see the pandemic will arise, and the scale of its effects cannot e underestimated.
Our current black swan event, one that needs scrutiny, is the coronavirus pandemic. It’s essential that we asses the effects brought about by the pandemic, and with time we shall learn from the effects. Corona pandemic creates the black swan event we tend to experience in our day to day life when we handle this real-time pandemic; we get an insight of the effects of the black swan event to both sectors the users as well as the affected economies in the world. Coronavirus is the black swan of 2020, as most of us know that we have personally felt the impact of the virus. With lives being at risk, the only solution remaining is hoping that we get to return to normal situations and activities as well. The precautions put in place serve to help contain the situation and protect the healthcare, welfare for the situation with the employees. Your families such a situation fulfills the characteristics of the black swan event as uncertainty looms.
Drops in business activities have been observed. Some companies have been greatly affected, and we get to see that majority of the companies that rely on labor as a driver of their activities. We get to see that companies have experienced sharp drops in their projected growth rates, which now are replaced by sharp drops. Companies and businesses that initially were on track are now at risk of missing their mark. Disruptions have been experienced in the supply chain sector where the unexpected lockdown in a country is seen to directly affect the global distribution of supplies and now forces the typical retailer to solicit from other suppliers building new bonds with suppliers.
As the supply chain disruptions continue amidst this corona pandemic, we get to see that travel banns issued to affect the transportation industry and canceled meetings affecting business transactions. Companies have banned not essential travels, and some countries don’t allow movement, meaning businesses will lose out a lot. Containment of the virus will be found, and with the hope that it happens sooner rather than later, its only hope that’s left people and companies have the hope that the virus will be contained soon so that businesses and operations can continue in their normal activities.
The negatives drawn from the black swan are evident, and its also true that there is always a positive attained from such events one way or another. The positives have a long-term impact on what will happen once all this ends. The stock market, for instance, has been hit with a major slump. We get to see that the market is now on an all-time low. Quite true, the market has been hit, but it’s true to say that the stocks couldn’t constantly be increasing. People are restless when the stock markets go down, and the truth is the stock market cannot be on the all-time rise. It was getting overpriced with time, and the black swan event has offered a chance for the situations to return to normal (Morales & Andreosso-O’Callaghan, 2020).
The impact that comes with an overpriced stock market is that prolonged interest rates are given to people. The special tax cuts which are created on a short-term basis in various market price spikes are more likely to happen from the stock purchasers and other corporate financial engineering sectors (Kandel et al., 2020). The practical illustration of the eventual impacts was it not for the black swan event would be. Picturing this act as a balloon constantly being filled, the elastic limits the balloon holds will eventually be a meet and be instantly or not when it meets the balloon will surely burst. This eventual burst is what can happen to the economy when such situations continue uncontrolled. Therefore, the fears that the coronavirus pandemic will deflate the economies serves as a prevention measure that stops the eventual collapse of the major stock market.
One important sector in a country and the world is the healthcare sector. The coronavirus pandemic has shown the need to reevaluate the healthcare system of a country. The American healthcare system has been associated with major problems in the past, and this pandemic has shown the general weak points as well as the unpreparedness for pandemics. It forced politicians to reconsider and prioritize healthcare (Wind et al., 2020). The pandemic has served as a whistleblower for the healthcare services the poor equipment of the sector, which greatly affects the countries activities in terms of manpower since a healthy nation is a wealthy nation. The need to offer proper healthcare bills has been highlighted with the fact that even those capable of paying huge bills have it hard accessing healthcare facilities as some are overworked past their capacities, and their poor equipment makes a good number of them incapable of handling pandemic victims.
Conclusion
Black swan event is rare, and the effects of the event can hurt economies immediately as well as project their effects on the future. It’s important to learn that the unprecedented effects cannot be controlled. Still, they can be minimized where need be, and with time the takeaway from such pandemics will be enough to propel countries to their desired futures as well as avoid future problems that may arise from such pandemics as preparation against such pandemics will be improved. It’s important to note that for every bad there is a good, with the large number of bad factors associated with the black swan, its important to note that some positives can be drawn from the same event.
References
Aven, T. (2013). On the meaning of a black swan in a risk context. Safety Science, 57, 44-51.
Kandel, N., Chungong, S., Omaar, A., & Xing, J. (2020). Health security capacities in the context of COVID-19 outbreak: an analysis of International Health Regulations annual report data from 182 countries. The Lancet.
Morales, L., & Andreosso-O’Callaghan, B. (2020). Covid19: Global Stock Markets, “Black Swan.”
Nafday, A. M. (2011). The consequence-based structural design approach for black swan events. Structural Safety, 33(1), 108-114.
Wind, T. R., Rijkeboer, M., Andersson, G., & Riper, H. (2020). The COVID-19 pandemic: The ‘black swan for mental health care and a turning point for e-health. Internet Interventions.