Financial Black Swans: Unpredictable Threat or Descriptive Illusion?

Abstract

This chapter discusses the threat posed by rare but high-impact events in finance: serious market crashes or financial meltdowns, such as the crisis of 2008. These crises have been metaphorically interpreted as “black swans” by Nassim Taleb in a book that made a worldwide impression, The Black Swan: The Impact of the Highly Improbable (2007). A “black swan” is an event that is very unlikely and not normally to be expected (i.e., an “outlier”) but which, if it does occur, will have extreme and possibly catastrophic consequences. This chapter proposes an alternative understanding of the threat of financial black swans. The argument is presented in four steps. (1) The financial probable is symbolised in mathematical language by written expressions of the measure of risk, based on specific assumptions about uncertainty, which I have called “the financial Logos” (Walter, 2016). (2) The mathematical language used to capture the financial probable is not merely a descriptive language for financial risks (representational view of language) but a language that produces a “speech act” (pragmatic view of language) in the sense of financial models understood as speech acts: the financial Logos speaks and transforms the world through financial instruments and financial regulation. (3) The writing down of the probable lodged in risk models and prudential rules can thus be a source of the danger those very models and rules seek to contain. (4) Financial black swans can thus resemble unexpected consequences of the words (“speech act”) of the financial Logos. As a result, considering financial black swans as radically unpredictable events, in line with Taleb’s view, is a descriptive illusion. I thus counter the theory of Taleb’s financial black swans with the theory of the financial Logos, considering that the second of these theories offers better protection against the threat of financial crises.