• What is the black swan theory?
  • A brief history of the black swan theory
  • Examples of black swan events
  • What do black swan events mean for the housing sector?
  • Conclusion: what the black swan theory means for you

There are quite simply some things that are impossible to foresee or prepare for, no matter how vigilant you are. When large-scale unpredictable events occur, they can have a catastrophic impact on an organisation. This is often referred to as the black swan theory.

In this article, we will look in more depth at what the black swan theory is, examples of black swan events and what they can mean for the housing sector when such an event occurs. Although it is impossible to prepare for this, we are hoping this guide may be able to at least make you aware of the consequences and think about how you could mitigate risk at your organisation.

What is the black swan theory?

A black swan is an unpredictable event that is difficult to predict in the normal course of business. They often go beyond what is normally expected of a situation and can have serious impacts on an organisation. They are quite often random events, where no past data or planning can point toward their occurrence.

Fortunately, these types of events are pretty rare. There is usually some insistence after the event has happened that the black swan event was obvious in hindsight, although this is often not actually the case.

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A black swan event could be anything from a war to a natural disaster or an outbreak of a virus. Whatever the event, they are always regarded as outliers, because there isn’t necessarily anything that happened in the past to suggest that an unpredictable event like this could happen.

However, this isn’t always the way. Black Swan events might be rare by nature, but it is often highly probable that something similar has happened before. Using the examples we used above, a natural disaster will always have devastating consequences, but earthquakes, flooding and volcanic eruptions have all happened before and as a society, we are therefore expecting them to happen again at some point. Although, as we know, these events can still come from nowhere and catch us by surprise.

The same can be said about the Covid-19 pandemic, which is classed as a black swan event by many and has had a huge impact on the housing sector. Despite its severity, it wasn’t the first time society has had to deal with a worldwide health pandemic, but being able to prepare or plan for such an outbreak is no easy task.

Highly probable events that don’t happen can also be referred to as black swan events. You can also get negative or positive black swan events.

A brief history of the black swan theory

The term black swan theory, or black swan event, was coined by Nassim Nicholas Taleb, a former Wall Street trader who was also a finance professor. Taleb’s theory first started to gain recognition when he wrote a book about the idea in 2007, prior to the 2008 financial crisis. Taleb argued that people should always assume that a black swan event is a possibility and try to plan for it appropriately, despite the fact they are incredibly hard to predict and very rare.

According to Taleb, black swan events share three main characteristics. They are:

  • Black swan events are outliers: There isn’t necessarily anything from the past that suggests the event will happen.
  • Severe in nature: A black swan event will have extreme impacts on society and quite often the world.
  • Predictable after the event has occurred: Rightly or wrongly, after a black swan event has happened, people question why we weren’t prepared. With the ability of hindsight, it seems like the event was both explainable and predictable.

Examples of black swan events

Throughout history, there have been a lot of black swan events that have come in various different forms and had massive impacts on society. Here, we are going to focus on a couple of the more recent events that fall into this category that are relevant to the housing sector.

Let’s start with an obvious one, the financial crisis of 2008. This was a severe worldwide economic crisis that initially caused the U.S. housing market to crash, as a combination of predatory lending schemes targeting low-income buyers and reckless risk-taking by global financial institutions caused a worldwide economic meltdown.

Having released his book just before the crash, Taleb’s black swan theory has always been associated with the financial crisis of 2008, as many of the characteristics he defined can be applied to this event.

Of course, more recently, the Covid-19 pandemic also shares a lot of the characteristics associated with a black swan event. For many, whether this global pandemic should be listed as a black swan event is up for debate. However, it does meet a lot of the criteria and the repercussions for the housing sector were huge.

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It was fairly predictable that a global pandemic of this ilk would occur at some point, but the unpreparedness of governments and organisations worldwide and the ferocity at which the virus spread means that it’s still regarded as an outlier event. The pandemic has been disrupting markets and global economies around the world since the spring of 2020, and is still having dire impacts now.

An interesting observation here is Taleb’s third black swan theory characteristic that we listed earlier. Taleb stated that once a black swan event has happened, everyone thinks the event is explainable and could have been predicted, wondering why we weren’t ready for it. This is certainly applicable to the pandemic.

You can read more about the impact Covid-19 had on the housing sector in our LinkedIn article Covid Backlog and the Skills Shortage: How Can Your Business Cope?.

What do black swan events mean for the housing sector?

As we mentioned earlier, despite the Covid-19 pandemic not being a true black swan event, it’s closely linked to the black swan theory’s main characteristics. Due to the lack of preparedness and the severe consequences felt worldwide, economies and industries around the world are still struggling to cope. Inflation is rising, fears of a global recession are increasing and supply chains are still experiencing difficulties, which means there is an uncertain future for many at the moment.

The big question is, how do you prepare for the unknown? As an organisation in the housing sector, it’s not so much about predicting when such events will occur, but acknowledging that it will happen at some point and making sure your business is stable and resilient enough to deal with the consequences.

No alt text provided for this imageIn some circles, it is being discussed that the next major black swan event could be a housing market crash, due to soaring housing prices and rising mortgage rates. Understandably, this kind of rhetoric will cause a great deal of uncertainty among buyers, as investing when there are early signs of a black swan event is incredibly risky. If there is uncertainty in the market, then you have the issue of a black swan event causing problems before the event has even occurred.

There are of course those that will look to profit if a black swan event in the housing sector occurs. The term black swan investing is about looking for investments that could return huge profits if markets plunge. This strategy only works once the crash has happened, so is very risky up to the point of it occurring and there aren’t any guarantees of it being a success.

It goes without saying that black swan investing is not for those that are risk-averse.

Conclusion: what the black swan theory means for you

Hopefully, you now have a better understanding of what is meant by the term black swan theory. At any organisation, it’s important to mitigate risk by being prepared, but as we have explained in this article, most of this preparation goes out of the window with a black swan event.

Ultimately, in order to deal with an unpredictable event, your organisation needs to be as stable and resilient as possible. It also helps to stay on track with industry trends and be aware of what’s happening in the sector.

At ROCC, we want to make sure you’re always able to stay one step ahead and our housing maintenance solutions ensure your business can be flexible enough to adapt to any situations that occur enabling you to focus on the people that really matter, your tenants.