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Volume 32, Issue 2

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Monday, 18 March 2019 15:29

Brexit: the unintentional evolution of a Black Swan event

Geary Sikich explains why he believes that Brexit is a Black Swan event and describes various issues that enterprise risk managers should consider when assessing and managing Brexit risks.

In his book, ‘The Black Swan: The Impact of the Highly Improbable’, Nassim Taleb defines a Black Swan in the Prologue on pages xvii – xviii, xix, xx – xxi, xxv, xxvii.  I quote a few (what I consider) key points:

xvii: “What we call here a Black Swan (and capitalize it) is an event with the following three attributes:

First is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.

Second, it carries extreme impact.

Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

xxv: “The Platonic fold is the explosive boundary where the Platonic mindset enters in contact with messy reality, where the gap between what you know and what you think you know becomes dangerously wide.  It is here where the Black Swan is produced.”

xxvii: “To summarize: in this (personal) essay, I stick my neck out and make a claim, against many of our habits of thought, that our world is dominated by the extreme, the unknown, and the very improbable (improbable according to our current knowledge)…”

To summarize:

A Black Swan is a highly improbable event with three principal characteristics: it is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was.

Taleb continues by recognizing what he terms the problem: “Lack of knowledge when it comes to rare events with serious consequences.”