Black Swans and Our Inability to Consider the Unthinkable

Updated: Apr 15




I can't think of a book that has become more relevant in 2020 as Nassim Nicholas's "The Black Swan".


What is a black swan?

A black swan is simply an event that we believe to be impossible but happen anyway. Black swan events are devastating because we don't believe they will happen. So, when they do happen we find ourselves completely unprepared to handle it.


Why would we call these rare and devastating events "black swans"? The term comes from a time when humans had only encountered white swans. Since we had only ever seen white swans we held a belief that swans are white and that black swans did not exist. So, when humans discovered the first black swan it fundamentally changed their belief about what a swan is.


When we come across an event that fundamentally changes our perception of what is possible, it is referred to as a black swan event.


Not all black swan events are created equal

Black swan events can come in all shapes and sizes from personal events to global events.


An example of a personal black swan event might be something like losing your job. Maybe you believe you have complete job security. Since you believe it is not possible for you to lose your job you decide you don't need to save any money and in fact you decide it's no big deal to load up on debt while you're at it.


You do this because you are working under the assumption that you will always have another paycheck coming in every two weeks. Then the unthinkable happens. You lose that job that you believed you could never lose. Without that paycheck coming in every two weeks you can no longer afford the lifestyle you once enjoyed. Since you have no savings and a pile of debt, you fall into a period of extreme financial hardship.


We are currently living through what might end up being the largest global black swan event of my lifetime. I am of course referring to the coronavirus.


The spread of the coronavirus into a global pandemic is something that many of us believed impossible a few months ago. Now that it is at our doorstep, it has fundamentally changed what we believe is possible.





Access to information can mitigate exposure to black swan events

But only if you act on it.


We in North America have had access to information about the coronavirus weeks and months ago but failed to act with the seriousness that the issue deserved.


First, we saw what was happening in China and we figured that it would stay in China.


Then, we saw what was happening in Europe and other parts of the world but somehow we still did not believe it could happen here.


It wasn’t until sports and events began to get canceled and celebrities contracted the virus that most people took the coronavirus as seriously as they should. Even now, there are still people not taking it seriously enough.


Why we don't see black swan events coming

From a certain point of view, it's hard to blame people for missing the seriousness of the coronavirus. In his book, Nicholas reviews the many cognitive biases that prevent the human brain from being able to predict black swan events. There are two in particular worth focusing on.


  1. Our tendency to put too much weight on past events.

  2. Confirmation bias.


We assume history will always repeat itself

Humans are dogmatic to our beliefs and that makes it difficult for us to accept events that are contrary to the things we currently accept as “true”.


A few months ago, many of us in North America believed that a widespread pandemic could “not happen here”.


Why did we believe this? Because it had never happened here in the past (at least not during my lifetime) so we adopted the belief that it would never happen here in the future.


Confirmation bias

Once a person truly believes something, it's difficult to change their mind. One reason for this is confirmation bias.


Our brains are wired to seek out information that backs up what we already believe and ignore evidence that contradicts our beliefs.


If you start with the belief “this could never happen here”, you are naturally more inclined to seek out evidence that suggests “it won’t be so bad”. That is why until recently we saw many people suggesting that “the Coronavirus is the same as the flu” and that “people are getting worked up over nothing”.


These people started with the belief that the coronavirus would not impact life in North America and then they sought out articles comparing coronavirus to the flu. They did not seek out the research that made it clear this is nothing like the flu.


Scalable vs non-scalable information

A valuable insight I learned from reading "The Black Swan" is the difference between "non-scalable" and "Scalable" information and our brain's ability to process each type of information.


Non-scalable information: is something physical and relatable to our everyday experience. For example, humans can easily understand how big your cat can be. A house cat can not weigh 500 pounds. It would die well before it reached that point.


Scalable information: scalable information is not boxed in by the same physical limitations as non-scalable information.


An example would be how many times an article can be read. Nearly everyone with access to the internet so there is essentially no cap on how many people can read an article. There is also no restriction on how many times a single person can read that article so it is difficult to predict how many times a single article can potentially be read.


Humans are good at processing non-scalable information and bad at processing scalable information.


How fast and wide the coronavirus can spread is non-scalable information. Researchers can tell us with a fair amount of accuracy how many people will be infected and when based on how we respond to the pandemic.


That is why in the past week, North America has widely accepted the practice of "Social distancing".


It's easy for us to understand that since a virus is spread person to person, that the easiest way to limit the spread of the virus is to limit non-essential human contact until the virus is contained.


If society had collectively rejected the concept of social distancing, the coronavirus would be spreading much faster and inflicting even more damage.


Understanding human limitations can help us make better decisions

The first step to making better decisions and mitigating the damage of future black swan events is to accept the fact that as a human you have cognitive biases that you need to be aware of.


For example, if you understand that past performance of the stock market does not dictate what happens in the future, you might be more likely to reconsider your risk tolerance and diversify your portfolio into less risky assets.


If you accept that you have confirmation bias, it might trigger you to seek out research and information that does not align with your current beliefs.


By constantly evaluating our beliefs about what is possible and seeking out reliable information that challenges our beliefs we might expand our beliefs about what is possible.


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