Wednesday, 22 June 2016

Which color will be the "Brexit Swan"

For a long time, the mankind believed that swans were only white in color because all the known swans in the world were white. And then one day, a black swan was spotted. That single bird, destroyed the belief which was held for centuries. Ever since then, the phrase “Black Swan” has come to denote an event which is rare and also extremely heavy in its impact. 

Taleb, a former trader and a mathematician has developed a Black Swan Theory which states a Black Swan as an event which has “rarity, extreme 'impact', and retrospective predictability”. History is flushed with such events, which according to Taleb have significantly altered the course of history, and decidedly so, changed the human life.

An event belonging to the same family which will unfold tomorrow is the verdict on “Brexit”. In very simple terms, the entire UK population is going to vote on whether UK should exit or remain as a member of the European Union.

Economics arguments aside, the recent polls suggest an evenly divided picture in the UK voters.

The financial markets around the world, however, seem to be heavily factoring in that Britain will vote to remain in the EU, for instance, as captured in the way Pound has picked up against dollar recently.

In such pro-remain sentiment, the exit verdict will probably be nothing short of a “Black Swan” event. A surprise which will send ripples through the financial markets. However, if history is any indicator, traders who have taken extreme contrarian positions, are likely to make a windfall gain.
After-all, who in the financial world hasn’t heard of George Soros, the man who while betting on sterling’s devaluation made $1 billion in one single day in the year 1992.

In my opinion, the poll vote estimates embed an upward bias for the "Bremain".  First, because the sample set is not adequately representative of the local Brits population. Second, such referendums are more about sentiment than reason. Despite the whole reasoning of economics, there is nothing new that we know today in terms of the consequences of Brexit which we didn't know an year back. The genesis of this movement lies in deep nationalistic sentiment - and not in economic projections. In the race to the ballot, sentiment almost always trumps the reason.

Exit or Remain, the verdict will be out in 24 hours and the swan will reveal its colour. White or Black, which one are you betting on?! My bet is that the exit swan will be the one that surfaces on Thames, tomorrow. 

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