Two black swans? Or No Black Swans?

Dan Glaser, CEO of Guy Carp, stated last week that he believes that the current fallout from Coronavirus represents two simultaneous black swans.

Nassim Taleb meanwhile, the very guy who brought the term ‘black swan’ into popular consciousness, has stated that what we are dealing with at the moment isn’t even a black swan!

So what’s going on here? And who is right?

What exactly did Glaser say?

From the insurance insider:

MMC'S GLASER: CURRENT CRISIS IS ‘TWO BLACK SWANS’ AT ONCE
 “I am not aware of another time where there were two black swans that occurred at the same time,” he said, referencing first the pandemic and secondly the lockdowns imposed by governments across the world. [1]

Glaser does not elaborate on exactly what his definition of a black swan is (which of course you wouldn't really expect him to), but hashing his statement - he believes the virus itself, and then the subsequent government actions each represent a separate black swan. Moreover, he makes the claim that this is the first time that two black swans have ever occurred at the same time. Ever!

Hmmm… can we think of two events which could possibly count as black swans, which occurred at the same time, how about these little ones:

• Spanish Flu (Spring 1918-Summer 1919) and WW1 (Summer 1914 - Nov 1918)

 
The Spanish Flu - which was even more deadly and disruptive then Covid - occurred during WW1 - which is one of the most (if not the most?) significant event in modern history. Moreover both are more obvious candidates for ‘black swan-ship’ given their almost unprecedented nature at the time. This current crises is less significant than both of the above, but also much more predictable.

Since the two events at the moment – Coronavirus itself and the lockdown – are related, it’s not like Glaser's statement even requires that we need two unrelated events to occur simultaneously. Here are a couple of other examples off the top of my head:

• The Japanese 2011 Tsunami, and the Fukashima nuclear disaster 
• Pearl Harbour and the war in Europe (WW2)

 
Okay, so Mr. Glaser may have overreached with his ‘two at once as unprecedented’. Let’s return to the original question of whether this is even a black swan.

What did Taleb say about the Coronavirus?

Nassim Taleb, according to the following New Yorker article [2], made this statement:

“Nassim Nicholas Taleb is “irritated,” he told Bloomberg Television on March 31st, whenever
the coronavirus pandemic is referred to as a “black swan,” … “The Black Swan” was meant to explain why, in a networked world, we need to change business practices and social norms—not, as he recently told me, to provide “a cliché for any bad thing that surprises us.” 

So clearly Taleb does not believe it is a black swan, let’s not consider this a slam dunk yet though – Taleb is famously provocative and contrarian (which is what makes him such an entertaining writer), so he might just be saying this to get a rise and to attempt to assert some ownership over his idea.

What’s the definition of a black swan?

In order to decide who is right, we’re going to have to look at the actual definition of a black swan. It seems like everyone is throwing around the term and meaning slightly different things by it.

Let’s play a game, I’ll give you four options and you tell me which is the correct definition:

Definition 1:
A black swan is:

1. An outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.
2. It carries an extreme ‘impact’
3. Explanations for its occurrence are concocted after the fact, making it seem explainable and predictable

Definition 2:
A black swan is:

1. An event with probabilities that are not computable beforehand
2. It plays a major role
3. Arise from an incomplete assessment of tail risk

Definition 3:
A black swan is:

1. A ‘tail event’

Definition 4:
A black swan is:

1. An event which has a significant impact when it occurs.
2. which is an ‘unknown, unknown’ (to use Donald Rumsfeld’s famous turn of phrase)

Okay here are the answers (which you can probably guess):

Definition 1 is from the book ‘The Black Swan’
Definition 2 is from Taleb’s book ‘Silent Risk’ which is a more technical work covering the same topic.
Definition 3 and 4 were made up by me, definition 3 is the weakest version, and seems to be the spirit in which Glaser is using the term. Definition 4 mostly gets at the heart of definition 1 and 2, but has a slight different slant, definition 1 and 2 paint the event as effectively 'unknowable' (a tail event generated by a fat tailed process), definition 4 simply requires that the event is an unknown possibility prior to occurring. Taleb thinks there is an important distinction between the two; unknown, and unknownable - and in fact you could probably say that half of the book The Black Swan is just him highlighting the distinction.

Note that even 1 and 2 are slightly different, for example, definition 1 has the strange third condition that the event be accompanied with a bias to treat it as explainable in hindsight. This tendency seems more like an empirical statement about human psychology rather than an inherent property of any given event. It's certainly an important feature of how black swans are mis-mismanaged, but I don't think it should make up part of the necessary and sufficient definiton. In fact, Taleb drops it in the second definiton, and in The Black Swan even uses the example of a Turkey being killed at Christmas as a black swan event from the perspective of the turkey. I certainly don’t think a dead turkey is going to ex post facto rationalise the event!

Glaser seems to be using more definition 3, Taleb of course would use some variation of 1 or 2, as these are directly from him.

So why is this not a black swan?

An important aspect of being a black swan, as I kind of highlighted above, is the event needs to be fundamentally unpredictable:

From definition 1:
                “nothing in the past can convincingly point to its possibility”

From definition 2:
                “their probabilities are not computable”

The Coronavirus, while a tail event – was basically modelable.

For example:

• People now point to the Spanish Flu as a precedent, (COVID is not even as far into the tail as Spanish Flu). So in order to predict Covid we certainly can extrapolate from past events.
• Bill Gates in 2015 listed this very scenario as one of the biggest risks to humanity
• Taleb has a section in Silent Risk on epidemics and the implied tail risk
• There have been multiple epidemics/pandemics, etc for most of human history. Most recently, Ebola, AIDS, SARS, MERS.
• You could buy insurance for this very event (communicable disease cover)
• RMS has a pandemic cat model
• The WHO purchased pandemic bonds to cover a pandemic

Obviously it was impossible to predict that the pandemic would occur precisely when it did, but that doesn’t mean it wasn’t possible to model some sort of annual probability of occurrence, or to assess the likely impact if it did occur. Windstorms and Earthquakes are similarly not predictable to a specific time, yet we can still model their frequency and severity to a certain extent.

So who is right?

I’m afraid I’m going to have to side with Taleb over Glaser on this point. Firstly I don’t think we can take Glaser’s comments about two at once being unprecedented as correct, just look at the historical precedents. And I think the condition that the event be a true ‘unknown unknown’ is a fundamental part of the definition of a black swan, and Coronavirus just doesn’t quite meet this criteria. 

Covid in terms of market loss:
Before we finish I thought I’d comment on Covid in terms of the insurance industry total loss and the return period of such a loss. If we put COVID at USD 150bn all in (it’s going to take years for the final amount to be known, current estimates are more in the USD 50bn – 100bn range, I’ve applied some pretty heavy IBNER to this. I don't have any specific reason for doing so other than I think it is a good rule of thumb that people do tend to underestimate these losses initially).
​
I have some numbers in my head for the return periods of various market losses, my method for deriving them was to just bundle all known losses from all perils together (natural and man made) and then fit a curve with a decent tail. Based on this approach, I’d put a  USD 150bn market loss at about a 1 in 15 year event – so I don't think Covid is even that far into the tail! This is the kind of market loss one should expect a few time in his or her career. The probability of a true black swan event, by definition, can’t be computed by fitting a curve through past losses, and may well be an order of magnitude bigger than anything we’ve seen before, a pretty scary thought to end on!

[1] Insurance Insider article with Glaser's comments:
https://insuranceinsider.com/articles/133338/glaser-current-crisis-is-two-black-swans-at-once
[2] New Yorker article with quote from Taleb:
https://www.newyorker.com/news/daily-comment/the-pandemic-isnt-a-black-swan-but-a-portent-of-a-more-fragile-global-system