Lehman Bros and the 'Black Swan'

The Lehman Brothers collapse – a confirmation of ‘The Black Swan’
(By CA Rajiv D Khatlawala )
The theory of the Black swan was described by Nassim Nicholas Taleb in his best seller book – “The Black Swan” published in 2007. It is an interesting book which examines the impact of the highly improbable.

The term Black Swan comes from an ancient Western idea that ‘All Swans are White’ and hence ‘the black swan’ is something which could never exist; something which can never occur. However when Black Swans were discovered in Australia, the ‘commonly accepted belief’ was questioned.

Taleb, in fact, claims that almost all events in world history which are of consequence have come from the ‘unexpected’ and the unplanned. He cites that the attack on World Trade Centre is one such historical event which could not have been anticipated but it has consequently and subsequently changed and influenced world events dramatically.

Consider the latest financial turmoil we all find ourselves - the collapse of the 158 year old ‘robust’ financial firm Lehman Brothers is nothing short of a ‘Black Swan’. No one believed that, such a thing as this would ever happen. There was a ‘commonly accepted belief’, that such huge companies cannot go bankrupt, no matter what happens. But it did happen and I think once more we seem to get a living proof of ‘the impact of the improbable’.

And it is beyond doubt that this ‘black swan’ event, has and will, change financial history (and probably even world history). It is only hoped that we do not have a series of such ‘black swan’ events. We surely don’t need so fast a change in world history!!

It may not be wrong to say that even in the financial markets; we should all expect the unexpected! As investors and traders, we need to factor in the unexpected – the unpredictable, and only then we shall have consistency in investment profits.

CA Rajiv D Khatlawala