Paradigms and Black Swan Events - Coursework Example

In the world of finance, these events are those that affect dramatic market movements, such as, for instance, the 2001 terrorist attacks, as well as the 2007 financial crisis, which both drove the markets dramatically lower. The recommended financial strategies to accommodate large market failures precipitated by black swan events are, of course, centered on allocating a small percentage of a total portfolio towards investment instruments that are to spike when the markets crash, while keeping the large share of the portfolio in the safest, black swan-proof, investment vehicles.

This is part of a broader strategy aimed at spreading the risk among a greater number of vehicles for investment. One can say that these investing strategies may be an offshoot of an economic theoretical paradigm that may not be superior but is conditioned by the painful experience of previous black swan events. The paper explores the dynamics of shifts in theoretical paradigm springing from black swan events (Kim 2010; Bloch 2013; Sood 2013). II. Discussion A history of tectonic changes in macroeconomic paradigms can be summarized as tales of existing economic thinking, such as classical economics and fundamental supply and demand models being upended by black swan events, such as the Great Depression in the case of classical economics. . During the Depression this amounted to heavy spending by the US government to get the economy out of its hole.

One can argue from this that the new paradigm is adopted not because it is necessarily superior, but because it adequately addressed the black swan event of the Depression, and showed good results in spurring the economy back on a track to growth. This new paradigm fixed demand but was not particularly suited for instance to the black swan event of stagflation, where the economy was stagnant even as inflation spiked. The problem in this latter black swan event was that supply fell, leading to spikes in the prices of fuel and of food.

This black swan event then led to a shift in paradigm back to classical economics, with Milton Friedman arguing that market forces are the best determinants of market efficiency, and are best left to their own devices, with the emphasis this time not on-demand, as in Keynes, but on supply-side economics. Here then, from two successive black swan events, is proof that changes in economic paradigms are not necessarily driven by the shift to superior paradigms, but rather are borne out of the need to correct the imbalances and inherent problems in economic policies that were made evident by the black swan events.

In these two examples, it can be argued that classical economics and the efficiency of market forces is the superior paradigm, but as a result of the Great Depression, it was junked in favor of Keynes, only to be re-adopted, tweaked, after the stagflation crisis in the 1970s (Sood 2013; Bloch 2013).