What role do 'Black Swan events' play in financial crises?

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Black Swans and Financial Crises: The "Invisible Hand" That Ignites the Powder Keg

Hello! Regarding the role of black swan events in financial crises, I'll try to explain my views in a way that's easy for anyone to understand.

First, let's understand: what exactly is a "black swan"?

Imagine, in the world of ancient Europeans, a swan was synonymous with a "white swan." For thousands of years, all the swans they saw were white, making it an almost ironclad rule. Until one day, explorers discovered a black swan in Australia.

The appearance of this single black swan instantly overturned thousands of years of European "common sense."

So, "black swan events" refer to those that are:

Extremely rare and completely unexpected: It goes beyond everyone's normal expectations, and you simply cannot predict it using historical data and models.
Once it occurs, it has a disruptive and massive impact: Like the first domino in a chain, once it falls, it triggers a series of cascading reactions.
In hindsight, it seems logical: After the crisis, various experts will emerge to analyze and say, "See, because of reasons A, B, and C, this was bound to happen sooner or later." But beforehand, no one could connect these dots.

In simple terms, a black swan is that "surprise" you can never anticipate, but once it arrives, it can completely overturn everything.

So, what role does it play in financial crises?

You can imagine the financial system as a warehouse full of gunpowder. This warehouse might already have many problems: the gunpowder is damp, it's poorly stored, or someone is secretly smoking inside (e.g., excessive financial leverage, regulatory loopholes, asset bubbles, etc.). Although dangerous, as long as there are no sparks, everyone feels that all is well.

A black swan event is that unexpected spark suddenly thrown into the warehouse.

Its role is primarily as a "catalyst" and an "igniter".

Case 1: The 2008 Financial Crisis

"Common Sense" Before the Crisis: At the time, Wall Street elites used highly complex mathematical models to calculate that packaging large amounts of subprime mortgages (loans to people with poor credit for buying homes) into financial products (CDOs) was safe. Their models indicated that a nationwide decline in U.S. housing prices would not happen even once in several centuries. This was like them believing "all swans are white."
The Appearance of the "Black Swan": As a result, U.S. housing prices indeed experienced a nationwide, cliff-like decline. People with poor credit massively defaulted on their loans. This "impossible" event occurred.
The Role It Played: This black swan event instantly detonated the entire system. Financial products once considered "safe assets" turned into worthless paper overnight. Trust between banks evaporated instantly, and no one dared to lend money to anyone else. The lifeblood of the entire financial market—liquidity—froze in an instant. A global financial tsunami erupted.

Case 2: The 2020 COVID-19 Impact on the Economy

"Common Sense" Before the Crisis: The global economy was closely interconnected, supply chains operated efficiently, and people traveled and consumed freely across borders. No one in late 2019 would have predicted that the world would come to a standstill a few months later.
The Appearance of the "Black Swan": A novel virus triggered a global pandemic, and governments worldwide implemented unprecedented lockdown measures.
The Role It Played: This black swan in the health sector directly triggered a crisis in the economic sphere. Global supply chains broke down, the aviation and tourism industries halted, and stock markets experienced multiple circuit breakers. It wasn't a traditional economic cycle issue, but an external, devastating shock that instantly short-circuited the fragile economic system.

Why are "black swans" so terrifying?

Because they render all "risk management" based on historical experience ineffective.

Traditional risk management is like a weather station forecasting a typhoon. Based on historical data and satellite imagery, they can tell you roughly when the typhoon will arrive and how strong it will be, allowing you to prepare in advance.

But a black swan isn't a typhoon; it's a meteorite that suddenly crashes into your backyard. Your weather station simply doesn't have a warning system for that.

In the financial sector, the risk models of banks and investment institutions are all based on "what has happened in the past" to deduce "what might happen in the future." But a black swan is precisely something that "has never happened before." When it arrives, all models become useless.

Conclusion

So, to summarize:

Black swan events play the role of an "ultimate detonator" in financial crises. They are not the cause of the crisis themselves (the cause is the inherent fragility already present within the system), but they are the final, and most unexpected, straw that breaks the camel's back.

They expose, in an extreme way, all the overlooked risks and self-proclaimed "common sense" within the financial system. This also gives us a revelation: instead of futilely trying to predict what the next black swan will be, it's better to strive to build our "warehouse" more robustly and fire-resistant, reducing the "gunpowder" inside, so that even if a spark flies in, it won't trigger an all-consuming explosion.