Black Swan or Red Dragon

A couple of weeks ago, a Canadian reporter from Vancouver asked me a question about the black swans that seem to be emerging all over the place at an alarming rate, for example, as she said, the Brexit, the bombing in France, a Trump in the White House, Fed interest rate hike in December, Deutsche Bank crisis, and large scale terror attacks, to name a few. But, if there are many, many black swans appearing, by definition, they should not be called “black swan” anymore, as black swan is supposed to be rare, unusual, and consequential events that occur not too often. Well, we as humanity are in fact in an unusually precarious and delicate situation today, and the old rule about the black swan may just be broken as we speak.

As someone with Geology training as an undergraduate student, I would think a potential super quake in south Asia as a black swan, as warned by scientists from Columbia University. They found evidence that a super earthquake is being shaped up underground in Bangladeshi, a country with extremely high population density. There is not much seismic data from that region of the globe, so scientist could not give a time window for it to take place. But, if it does take place, it is going to be an 8.2 to 9 quake on Richter scale and 140 million people might be affected!

Black swan or Black swan theory was first used to describe as a metaphor, a simile, or a hint on an event that takes place all of a sudden and has tremendous impact, that people become aware of it often in hindsight. Because in the West in ancient times, people thought all swans were with white feathers, and black ones nonexistent. Then in 1697, after the Dutch explorer Willem de Vlamingh spotted a black swan in Western Australia, the theory took on a new explanation, denoting something highly unlikely but not at all impossible.

Nassim Nicholas Taleb is the founder of the black swan theory, he defined it as having the “The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology”, and “The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities).

In 2007, Taleb first used the term to describe unexpected events in the financial world, and then extended it to describe new discoveries in science and breakthroughs in arts, etc. The emergence of the Internet, personal computer, the assassination of Archduke Ferdinand before World War I, the collapse of the Soviet Union, the death of Alexander the Great, the arrival of the Europeans to Aztecs, the sinking of the “unsinkable” Titanic, and the 911 attack on twin towers in New York City, are all considered by Taleb to be examples of black swan.

Taleb’s definition of a “black swan” event has three components: first, it’s an exception, beyond the expectation of people, and there is no past event that can substantiate its occurrence in a convincing way. Second, it has huge and extremely important impact. And thirdly, even though it is an exception, people seem to be able to give quite plausible explanations in hindsight, making it look like something that can be explained and even predicted.

If, by the definition and observation of Taleb, that the collapse of the Soviet Union can be considered a black swan, then what about the collapse or disintegration of the Chinese Communist Party?! It must also be remarked as an even larger, more important, and more profound black swan event for humanity. This is so because the CCP is the last major link in the international communist movement, and CCP is also the largest in party membership among all communist and socialist states in the world. As the last and final communist regime in human history, the CCP has viciously and brutally endangered and massacred 70 million Chinese people in its 60 some years of history, more than the casualties of both world wars combined, so when this terror regime is disintegrated or disappears, its impact on China is bound to be unparalleled, and its impact to the world is also unprecedented. This would indeed be a global, planetary class of “black swan”!

Interestingly, such a global scale black swan event is actually predicted and foretold by some, so the whole event is already progressing toward completion as we speak and under the watchful eyes of the world. So when this black swan, or rather, the red dragon, as the Chinese Communist is often described, becomes a reality and the disintegration of CCP comes into fruition, people on earth will have not only hindsight on the event, but also a lot of foresight as well!

“Disintegration of CCP” comply completely with the three characteristics of Taleb’s definition of black swan. First, it is unprecedented and exceptional. Even outside of China, some doubt it could eventually happen. The Chinese Communist survived devastating blows to its very existence many times in history, and it subsisted till today, so there is no past incidence that could indicate the probability of its disintegration in an absolutely convincing way. Second, “Disintegration of CCP” could have huge, tremendous impact to the people of China and the world, because of the population of the country and its political and economic ties with the rest of the world. Thirdly, even though the “Disintegration of CCP” is an exception, but surely people could in hindsight give various explanations about its occurrence, rendering it explainable and predictable. For example, political scientists of future generations could attest that years before the CCP collapsed, there was the Tuidang movement (quit CCP and its affiliated organizations) that was similar to what happened to Soviet Communist just before its collapse, and that the Chinese regime is losing control and decaying in all aspects of the society: politically, economically, socially, and environmentally.

Taleb pointed out in the third edition of his book that the occurrence of black swan has something do to with the observer. For example, to a turkey and its butcher, the disastrous black swan event for the turkey is not even a surprise to the butcher! So the solution to this problem? Don’t be the turkey. Or, you can find the weakest and most vulnerable part of yourself and change yourself from bad luck, damaging black swan to a beautiful, benevolent white swan! Fascinatingly in China today, as the Tuidang movement continues and as the party is losing its control over the vast country and resentment from the masses becomes ever snowballing, the same can be applied as well and Chinese black swan or red dragon event is also observer specific. What is a black swan to the ruling Communist regime may be a white swan to the people!

The main conclusion from Taleb’s approach was not to attempt to predict black swan evets, but rather distinguish between the positive and negative outcomes of black swan, so people could build a solid foundation to deal with those potential, negative impacts of the event; or, we could prepare in advance and take advantage of the positive impacts of the event. Of the possible events that Taleb mentioned, one is the inability of Western banking system to deal with potential disaster. As well, Taleb also questions the presumptuous statistical model, the normal distribution, in risk management.  

People with imagination or foresight have thought of many future black swans, such as an alien attack on the Earth, GMO killing and disfiguring human beings, and mini black holes created by hadron colliders by mad scientists of Europe, etc. Of course, in the author’s opinion, the most pertinent black swan to our life today, is the red dragon in the biblical term being slain and smashed in China! So in light of that and most importantly, we should all ask ourselves the question, are we ready to embrace the upcoming black swan/red dragon event of a communism-free era? Or, have we built a solid foundation to deal with the upcoming changes in our world?

Dr. Frank Tian Xie is John M. Olin Palmetto Professor of Business and Associate Professor of Marketing at the University of South Carolina Aiken, in Aiken, SC, USA.