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/ / INSIGHTS

Understanding the Intricacies of Financial Black Swan Events: How to handle detection, prevention and response

Authored by – Bas Uildriks, Consultant and Transaction Monitoring Expert, Synechron, The Netherlands

Financial industry cybercrimes are most definitely on the rise. Black Swan events can also be a form of cybercrime in the financial world but, by their very nature, are much more difficult to foresee or predict.

According to the Corporate Finance Institute , the concept was first coined in 2001 by former Wall Street trader Nassim Nicholas Taleb who wrote about it in his book ‘Fooled by Randomness’ and later expanded upon it in his 2007 book ‘The Black Swan: The Impact of the Highly Improbable’ . It is defined as a highly improbable event characterized by three things: it is unpredictable, it carries a massive impact and severe and widespread consequences, and after the Black Swan event occurs people tend to rationalize the event as having been predictable (which is known as ‘hindsight bias’).

The truth is that Black Swan events are not intrinsically good or bad, and do not only apply to negative events. But, in recent years, they have certainly taken on negative connotations. Moreover, they don’t necessarily happen just in the world of finance. But, when they do, there can be dramatic ramifications and deeply negative results which can include massive financial losses, severe regulatory implications and often massive fines, and a dilution of the brand value and reputation of an organization which must inspire trust. With a Black Swan event, it is impossible to know what it will look like, or when it will occur, or who will execute the event – a political adversary, foreign organization, disgruntled ex-employee or an unknown would-be criminal. They are replete with multiple unknowns and the impact is usually tremendous.

 

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