Mr. Nassim Nicholas Taleb, a finance professor and a Wall Street trader, first used the term ‘Black Swan’. He described Black Swan as an unexpected but highly impactful event. Such events cause failure in business operations and grossly affect the standing of business organizations.
Popular Black Swan Events:
He associated the Black Swan events with temporary immobility among businesses under an economy. He coined the term after the financial crisis of 2008. It is called a Black Swan event because barring a couple of outliers, no one was able to predict its occurrence.
The impact of the same was not restricted to the U.S. it had far-reaching effects globally. Some other Black Swan events are as follows:
Hyperinflation in Zimbabwe in 2008:
Zimbabwe witnessed an inflation rate of 79.6 billion percent with a commodity like bread costing Z$550 million. Currency instability and the decision to not print notes gave rise to inflationary prices.
Dot-Com Bubble of 2001:
The characteristic of the event was mass investment in companies with “.com” tags. Such companies were yet to generate revenue but still made IPOs. At 5048, the NASDAQ Index( in 2001)doubled over the previous year. Companies like Dell and Cisco triggered panic selling when they placed massive sell orders on their shares. By the end of the year, many dotcom companies shut down and investment capital worth trillions of dollars vaporized.
Fall of Long-Term Capital Management (LTCM) in 1998:
LTCM, an established hedge fund lost almost 93.61% of its capital in less than a year. This was due to poor risk management. Since most investors had invested in it, the Federal Reserve prevented LTCM from defaulting. Thus, the Federal Reserve saved the U.S. from a major financial meltdown.
How can Businesses be Risk Secure?
Black Swan events can cause temporary paralysis in many businesses. However, if they follow certain procedures, they will be better equipped to handle Black Swans. Consider some pointers as follows:
During a crisis, one can assign the leadership certain response goals. Also, one should establish proper reporting channels of progress or failures. The leaders should know of the limited resources. They should be able to devise the best possible resource allocation strategy to ensure quick recovery from the crisis. Use of input prompts from channels outside the leadership to detect errors is a must.
Guidelines for executing the response goals should be followed. One should give precedence to the right thing for the company’s best interests. Each step catering to the response goals should be analyzed at its levels. The required changes should be made to avoid any delays in reaching the goal. After the crisis has passed, the leaders should discuss the high and low points in their execution with team members.
A comprehensive log of the proceedings by all levels of the organization should exist. This is for the future reference to avoid repeating errors
Black Swan events are impactful and unpredictable but being prepared in advance can help the business from incurring huge losses. A strategy for mitigating the effects of any incoming crisis should be in place. Leadership at all levels of the organization should be aware of the status of the organization. Risk management is at the core of any Black Swan event. Hence, any organization that has good risk intelligence or RQ will be able to protect itself from failure.Add to favorites