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Episode 133: Was that a Black Swan?

Black Swan Events with Mak and G

SHOW NOTES

With Facebook’s recent outage lasting over 6 hours and affecting millions of people, Mak and G are looking at what these ‘Black Swan Events’ really are, and how they can affect our finances…

 

Facebook’s recent outage cost them over $50 million dollars in lost revenue and affected millions and millions of people.

 

But what caused this outage? How rare are these kinds of outages? And is this anything to be worried about?

 

Today, Mak and G look at this ‘Black Swan Event’, they dive into where this term originates, and look at some financial ‘Black Swan Events’ we’ve had in the past…

 

“These drops were super rare, had a huge impact on things, and can be easily explained looking back, so why can’t they be seen before they happen?” – G

 

“The stock market doesn’t like uncertainty.” – Mak and G

 
Time Stamps:

00:20 – ‘Black Swan Events’, and how long Facebook went down for.

00:58 – Where the term ‘Black Swan’ originated from.

02:08 – The requirements for something to be classed a ‘Black Swan Event’.

02:53 – Financial ‘Black Swan Events’ that have happened in the past.

04:35 – What caused Facebook’s outage and who it affected. 

05:35 – Different examples of ‘Black Swan Events’.

 

Resources:

The Black Swan: The Impact of the Highly Improbable

 

Connect with Ben Jones:

 

TRANSCRIPT

MAK: You know when I think of October, I think of scary things. Halloween. Dressing up, spooky movies, and sometimes AWFUL….“Black Swan events”.

GRANT: I get that scary things happen. But, bringing out the “Black Swans” is terrifying.  Did you hear that we just saw a Black Swan event happen this past Tuesday?

MAK: Well, if you didn’t know, there was a blackout on October 5th when Facebook, Instagram, Messenger, and WhatsApp went silent.  It’s been called a “black swan” event.

GRANT: What happened, and how many people were affected.  Has it ever happened before?

MAK: Everything was down. A complete blackout for 6 hours.  In 2008, Facebook went dark for nearly a whole day and affected 80 million users.  This time it affected over 3.5 BILLION users.

GRANT: WOW!!! Maybe a little background would help. For most of history, people believed only white swans existed. But, in 1697, Dutch explorers found black ones living in Western Australia. They were the first Europeans to ever see them. Can you imagine?

MAK: That would be super weird.  What if you think we’re the only human beings in the universe, and then a group land a spaceship from a planet far away on the streets of New York? Wouldn’t it make you re-think a LOT of things? It’d have a huge effect on the world.

GRANT: That would be superior weird, and would blow your mind. How many more people would be out there?  Do they have any cool technology besides spaceships, like video games?

MAK: You’re so funny. A black swan was a common expression of “impossibility”, or something that could never happen. It’s kind of like when we say “Dad will give us $1,000 when pigs fly”. If the belief was wrong, it would make us re-think what we believe.

GRANT:  Isn’t that the truth.  Dad laughed at this.  About 2,000 years ago, a Roman, named Juvenal referred to a good wife as “a rare bird in the earth, and very like a black swan.”

MAK: It was something incredibly hard to believe.

GRANT: There was a book in 2007 that created the term “Black Swan event”. It had three requirements.  First, it was something VERY rare. 

MAK: Next, it has a major impact on things. Third, people could easily explain it afterward.

GRANT: Well, seeing this black animal was super rare.  Those who studied animals had to change some MAJOR beliefs about how animals could change colors and exist in the wild.

MAK: Yep, that would’ve been huge. But, they came up with explanations on how it happened.

GRANT: Do you know what’s funny?  In 2007, the same year of the book, a black swan with a rare genetic mutation was found by a Tasmanian fisherman and was WHITE. 

MAK: It wasn’t an albino either. This is fascinating, but what does this have to do with money.

GRANT: There have been several black swan events that were financial. Two of the biggest  happened in the stock market, and both were in October.  Isn’t that scary??

MAK: Absolutely!! On October 24th, 1929, known today as Black Thursday the stock market CRASH started. It was also followed by Black Tuesday the next week.

GRANT: That’s a lot of BLACK.  However, the CRASH was considered one event.

MAK: It definitely was rare, had a huge impact, and was easily explained after it happened.

GRANT: Yep. RARE-CHECK, HUGE IMPACT-CHECK.  EXPLANATION-People could borrow money really easily, invest, which pushed prices up. Companies showed more profits, with a bit of lying. When it fell apart, people couldn’t pay back the money and then……

MAK: Things crashed! The Great Depression hit which lasted for years and it destroyed lives.

GRANT: What a terrible time. Hey, isn’t it weird that when a company is “in the BLACK” it’s a good thing?  But, when we use it here, it means a very bad thing?

MAK: It does. For many of the parents, they’ll remember Black Monday in 1987. It was October 19th and stock markets fell by over 20%. If that was today, the Dow would have to drop…

GRANT: Almost 7,000 points today!!!!! That’s a LOT.

MAK: You got that right. These drops were super rare, had a huge impact on things, and could be easily explained when looking back. So, why can’t they be seen BEFORE they happen?

GRANT: That’s a great question if they’re so easy to explain later.

MAK: I guess we need to do more research if we want to know. Maybe another time.

GRANT: Investing in October can make people a little jumpy. But if you take all the days a stock could trade from 1929 until now, that’s 22,000 possibilities with two major events.

MAK:  Yep, that is rare.  So, what about Facebook? 

GRANT: Well, it looks like it was rare.  It affected billions of people, and when they look at it, they can easily explain it had to do with some work that was going on.

MAK: It didn’t only affect people talking about their cats, but businesses who advertise and sell. So, it had a huge effect on a lot of people – OVER 3.5 BILLION

GRANT: You have to also know that Facebook is in the middle of a government inquiry. Their stock price dropped 5%. Investors see possible issues that could affect profits going forward.

MAK: And, the stock market doesn’t like….

MAK/GRANT: Uncertainty!!

GRANT: Yep, investors who can’t figure out what’s going on don’t like the risk and sell.

MAK: We could get into the reason for the blackout, but I thought some of the black swan events were pretty interesting. They don’t have to be bad. Hey, finding a black swan wasn’t bad.

GRANT: Agree. But, it usually IS bad. Is COVID a black swan? What did the author say?

MAK: He said it wasn’t, because it isn’t as rare as we think.  That’s scary.

GRANT: I agree.  How about we name a couple of examples from his book?

MAK: World War I

GRANT: Collapse of the Soviet Union

MAK: Personal Computers

GRANT: September 11

MAK: The rise of the internet

GRANT: Those are huge.  RARE, MAJOR IMPACT, and EASILY EXPLAINED afterward.

MAK: Yep, it’s hard to believe people couldn’t see personal computers or the internet.

GRANT: That’s old school.  What did mom and dad do before both of them?

MAK: Maybe they….. talked to each other.  No, that’s just too weird.

GRANT: AGREE. It’s time to say goodbye. Here’s to nothing scary in the markets this month.

MAK: Amen!! See you next time for more…..

GRANT/MAK: Money with Mak & G.  Bye!!

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