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Dirty White Swans: could unexpected extreme events put you out of business?

Author: Zeisberger, Claudia ; Munro, DavidINSEAD Area: Decision SciencesPublisher: Fontainebleau : INSEAD, 2010.Language: EnglishDescription: 5 p.Type of document: INSEAD CaseNote: Latest version available via https://publishing.insead.eduAbstract: Ever since author Nassim Taleb introduced “black swans” (an extreme event that might put you out of business) into the lexicon, and the financial events of 2008-9 supported his thesis, corporate risk departments, hedge funds and individuals have searched far and wide for the elusive bird. But most black swans are just dirty white ones. They catch us by surprise, but shouldn’t. This is due to our human bias to dismiss obvious evidence, restrict historic observation to our personal set of life experiences and refrain from hedging an identified risk believing that it probably won’t occur. This article defines six simple techniques to help protect businesses from black swans.Pedagogical Objectives: The purpose is to set the scene for a risk management discussion that goes beyond the oft-used pretext of risk managers when they blame “unexpected events”. In reality, most of what we call black swans – unpredictable events with massive consequences – are just dirty white swans: entirely plausible and hedgeable events if you study history, perform basic due diligence, employ value-based hedging and listen to warnings of danger.
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Latest version available via <a href=https://publishing.insead.edu>https://publishing.insead.edu</a>

Ever since author Nassim Taleb introduced “black swans” (an extreme event that might put you out of business)
into the lexicon, and the financial events of 2008-9 supported his thesis, corporate risk departments, hedge funds
and individuals have searched far and wide for the elusive bird. But most black swans are just dirty white ones.
They catch us by surprise, but shouldn’t. This is due to our human bias to dismiss obvious evidence, restrict
historic observation to our personal set of life experiences and refrain from hedging an identified risk believing
that it probably won’t occur. This article defines six simple techniques to help protect businesses from black
swans.

The purpose is to set the scene for a risk management discussion that goes beyond the oft-used pretext of risk
managers when they blame “unexpected events”. In reality, most of what we call black swans – unpredictable
events with massive consequences – are just dirty white swans: entirely plausible and hedgeable events if you
study history, perform basic due diligence, employ value-based hedging and listen to warnings of danger.

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