Gray Swan Event

Gray swan is a significant event whose occurrence could be predicted, but the likelihood is low.


What Is a Gray Swan Event?

A gray swan event is a predictable event with a low likelihood of occurring. Its defining characteristics are:

  • It can be predicted.

  • It carries a huge impact with a domino effect.

  • After it occurs, explanations are created that recognize its predicted probability, but the focus is shifted to human error in judgment.

A good example of a gray swan event is the coronavirus pandemic. While the chances of such an event occurring remain low, they are never zero.
A gray swan event in the crypto world is the hacking of a centralized exchange (CEX). These exchanges invest a lot of time and resources into security. However, nothing is 100% secure which leaves a margin for hacks.

How to Prepare for a Gray Swan Event?

It is important to balance protecting oneself against a gray swan event while managing other risks. However, ignoring it can lead to huge losses. An investor should build resilience in all investment decisions. To do this, they should treat resilience as a continuous effort rather than a one-off exercise.
One way to build resilience is to take loss-mitigation measures in your investment choices. It would help if you had contingencies in place to ensure that you know how to manage the crisis when gray swans occur. 

For individuals and organizations, it could mean creating a response plan that is the go-to for a specific crisis. In other cases, it could mean holding simulations to build muscle memory so that you know how to respond.