What Is a Grey Swan?

Grey swan is a term used to describe a potentially very significant event that is considered unlikely to happen but still possible. Because there is a slight chance the event will occur it should be anticipated, particularly as it could shake up the world, economy, and stock market.

Key Takeaways

  • A grey swan is an event that is possible and known, potentially extremely significant, but is considered not very likely to happen.
  • They can be positive or negative and significantly alter the way the world operates, which is why we are urged to take them seriously.
  • Examples of grey swans include climate change, population growth, and rising debt.

Understanding Grey Swan

Grey swans are not viewed as entirely improbable, meaning their presence is known about beforehand. They can be positive or negative and significantly alter the way the world operates, which is why we are urged to take them seriously.

Examples include natural disasters, such as Katrina, Britain’s unexpected decision to leave the European Union (EU), otherwise known as Brexit, President Donald Trump winning the U.S. election, or a revolutionary, technological breakthrough, such as the internet.

The outcome of these types of events cannot necessarily be predicted with ease. However, that does not mean that those who stand to be affected should not draw up some form of plan for how to potentially handle them, regardless of how improbable they might seem.

Grey Swan vs. Black Swan vs. White Swan

Grey swan is a by-product of black swan, a term popularized by finance professor, writer, and former Wall Street trader Nassim Nicholas Taleb. Taleb described a black swan as an extremely unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. 

He outlined the three core attributes of a black swan as:

1) An outlier because nothing in the past can convincingly point to its possibility.

2) Carrying an extreme impact.

3) Something that can be rationally explained after it occurs.

Taleb’s theory, penned in his book: “The Black Swan: The Impact of the Highly Improbable”, went on to become a fashionable way to classify all catastrophes. Then some observers began to note that not all big things that happen are out of the blue and completely improbable. Instead, some events are clearer and slightly easier to see coming.

From there, the terms grey and white swan were born. The former is used to describe events that are slightly more predictable than black swan ones, while the latter is characterized as something almost certain to happen.

Black, grey and white swans also vary in terms of the impact they are perceived to have. White swans are said to have little implications, impacting the life of one or a group of people rather than the entire globe. Grey, and even more so black swans, are viewed differently, causing events that can be potentially devastating for many. The main difference between the two is that one is known about beforehand, while the other takes us completely by surprise.

Examples of Grey Swans

Everything from climate change, population growth, and rising debt have been categorized as grey swans. We are aware of their presence, but perhaps do not take them seriously enough, even if each of them could end up having severe, wide-ranging consequences, such as triggering an earthquake or another Great Depression.

Every year, Asia-headquartered global investment group Nomura releases its prospective grey swans for the next 12 months. In 2019, the following made its list:

1.   End of populism
2.   Oil price plunges to $20 a barrel
3.   The big market quake
4.   Italian renaissance
5.   Emerging market deflation
6.   Chinese yuan comeback
7.   Global growth takes off
8.   Deflating euro area
9.   Inflation sonic boom