Let’s open a dedicated thread for Black and Grey Swans. By definition, these are either impossible or difficult to predict, or at least to time. Their consequences are also difficult, if not impossible, to foresee.
Nevertheless, pondering these could be useful, as we, as investors, certainly don’t want to be “turkeys”. The turkey example is famous: how a long-lasting rise (here, the turkey’s well-being, in the stock market it would be a long bull market) can suddenly end for the turkey on Thanksgiving. All the “well-being” accumulated over the previous 1000 days is wasted in a single moment:
A Black Swan is, by definition, a phenomenon,
i) which is very difficult to predict and comes completely out of the blue. There are many kinds of phenomena. For example, the WTC attacks were a Black Swan for everyone else, except, of course, the terrorists who carried out the attack. The rise of a company like Google to dominate our lives in a couple of years is also a Black Swan: impossible to predict beforehand.
ii) whose probabilities are difficult, if not impossible, to estimate
iii) which has massive long-term effects
iii) and which are rationalized in hindsight: “it was foreseeable”.
A Grey Swan is a “Black Swan” that we can anticipate but not necessarily time. For example, a pandemic is a Grey Swan: it was relatively clear that at some point in an interconnected global world, a local epidemic would get out of hand. The timing, however, was impossible.
There are slightly different descriptions of the Black Swan, but this is, to my understanding, closest to the description by Nassim Taleb, who coined the term (note: prior to this, there was already the Black Swan problem, which relates to inductive reasoning).
In itself, a thread where we try to guess these is therefore somewhat contradictory: the Black Swan is one of the best arguments for why making big predictions is rather futile and actually makes us fragile to surprises. Thus, a big role in the discussion is also how to build one’s stock portfolio/wealth in such a way that it withstands completely unexpected shocks and doesn’t become “turkeys”.
