Is there a potential event that could negatively impact your world so much that it’s imperative you insure against it?
Of course. That’s why you carry fire insurance on your home, for example. The odds of your house burning to the ground are very low – but the outcome would be so financially devastating that you need to have insurance to protect against the loss. The same could be said of life insurance, auto insurance, etc.
What about an economic or monetary event that, in spite of you being prudent with your money, could damage your financial status?
Those exist too, and they’re called “black swans.” It’s this type of event that is the basis of our third installment in the core reasons we must continue to own gold. In spite of gold’s recent waterfall decline, we’ll show that the need to own gold has actually grown.
First, what exactly is a black swan?
Like a black swan bird – something that occurs rarely in nature – a black swan event is a high-profile but rare occurrence that is beyond the realm of normal expectations. The term was introduced by Nassim Taleb in his 2004 book, Fooled by Randomness. It’s a metaphor that, according to Taleb, has three characteristics:
The event is a surprise
It has a major effect
After the event, it is rationalized by hindsight, as if it could have been expected. In other words, the data were available to foresee it, but risk mitigation programs didn’t account for it.
What I found interesting in reviewing Taleb’s thesis is that he stated in 2004, “Banks and trading firms are especially vulnerable to hazardous black swan events and are exposed to losses beyond those predicted by their defective models.” In other words, his black swan theory essentially predicted the financial crisis that hit four years later.