Wednesday, October 2, 2013

Out-of-the-Blue Swans: Megatsunami, Supervolcanos, The Black Death, and Other Cataclysms

The Out-of-the-Blue Swan is out there waiting to ruin our
day, month, year, decade, or century.
This is the fifth in the series "Many Shades of Black Swans", following on the introductory post "Think You Know Black Swans? Think Again." This will be a short post because the phenomena and implications on risk management are fairly simple (at least for individual people and firms). I've seen a few people include these in their list of "Black Swans" if they want to emphasize events with massive destruction and unpredictable timing.


The Out-of-the-Blue Swan is a system consisting of a generating process and estimation process where:
  1. The generating process is a relatively simple destructive energy source of massive proportions -- kinetic energy, chemical or biological poison or disease, or even a human force that leads to social collapse (e.g. Barbarian invasions of Rome).
  2. The evidence is usually in the form of fossils, archeological remains, geological formations, or ancient human history.  More recently, science has begun to discover generating processes that may not have hit Earth yet (e.g. Gamma Ray Bursts).
  3. The estimation process is usually some method of frequentist statistics.  It's usually not a question of how severe the event might be, but the biggest challenge is estimating likelihood because they are very rare and detailed causal data is inaccessible.

Main Features

It may take a while for humanity and science to discover the generating process, but once we do, they are fairly obvious so see.  Compared to other Swans, Out-of-the-Blue Swans aren't so baffling or confounding. There's no real "innovation" in the process and thus there is statistical continuity between past, present, and future.  It may take us some time to understand the statistics, but we can reach across long periods of history if we can get the data. 

Another distinguishing characteristic is that they are all about extreme magnitudes (i.e. destructive energy, virulence, etc.) and they deliver this energy fast, in an impulse, not in a gradual process. Thus patterns and system dynamics play almost no role in their extreme effects.

There's a lurking character to the generating process.  The energy source exists out there and there's some process that brings it close to impact (or take-off, or invasion) on rare occasions.

Finally, with a few exceptions, there's no defense once the Out-of-the-Blue Swan event happens.  The exceptions include pandemic, where modern medicine and modern public health can definitely mitigate the regional and global impact in many cases.  The same goes for collapse of a currency, a financial system, or political system.  But if you are in a region where there is no adequate public institutions and governance, then cataclysm is usually the result.


On a global scale:
Out-of-the-Blue Swans can also operate on a more limited scale and scope, too:
  • Massive military invasion, civil war, or genocide
  • Failure of the political system
  • Sustained collapse of the currency (e.g. via hyperinflation) or financial system.


  • Predictions of the End of the Earth based on numerology, Mayan or other prophesy, messages from space aliens, and so on.
  • Global climate change and other gradual processes, regardless of their magnitude

Why Out-of-the-Blue Swans Can Be Extreme

It's simple -- they can deliver huge destructive forces in an instant if the conditions are right.

Why Out-of-the-Blue Swans Can Be Surprising

They are surprising because they are so rare and because we don't have enough data on the detailed causal processes.  Thus, it's easy to believe that "this will never happen to me while I'm alive."  For most people, most of the time, this belief proves to be true in retrospect.  But when the Out-of-the-Blue Swan does strike, the victims are invariably surprised and unprepared.

How Out-of-the-Blue Swans Can Be Rationalized In Retrospect

After disaster has struck, the details of the causal processes can (in theory!) be examined and discovered.  Because the causal process is not mysterious or complicated, the only thing that needs to be rationalized is why this event happened when it did.  After the event, this can be rationalized by reconstructing the events and configuration that led up to the cataclysm.

How to Cope With Out-of-the-Blue Swans

If you are an individual or a firm, you cope with Out-of-the-Blue Swans through disaster preparation, recovery, and continuity plans.  In other words, you don't need to do anything special.  There's nothing to be gained by trying to estimate the infinitesimal likelihood of Out-of-the-Blue Swans.

If you are a re-insurance firm, then there is a compelling need to anticipate and estimate Out-of-the-Blue Swans.  This is one reason why re-insurance firms employ so many scientists who specialize in estimating probabilities of extreme events.

Likewise if you are a government or transnational coalition of governments, there is a real need to understand and take preparatory actions.  There are some thorny issues regarding how to make rational decisions in this setting, but I'm not going to tackle them in this post.

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