A tale of tail risk

It’s very common for climate commentators to liken the dire future they conjecture to the events that unfolded during the Global Financial Crisis (GFC) of 2007/09.  Famously, Nicholas Nassim Taleb suggested that the subprime catastrophe underlying the GFC was the classic example of a “black swan” event.  Taleb defines this as follows:

“It is an outlier—i.e., it is so rare that even the possibility that it might occur is unknown. It has an extreme impact when it occurs. In spite of its outlier status, explanations are created for it after the fact, making it predictable in the future.”

On the contrary, I agree broadly with this article, which argues that the financial market mayhem unleashed by the US subprime crisis qualifies as a black swan, but that the subprime mortgage troubles that preceded it do not. Read on, and you’ll understand why.