Dragon King Theory

Dragon King Theory is a concept in risk management that suggests some extreme events in financial markets, known as "dragon kings," are predictable and not random, unlike the traditional "black swan" events. These dragon king events are disproportionately large and result from underlying systemic imbalances or market feedback loops. The theory argues that by understanding these imbalances, analysts can foresee and possibly prevent such events. Dragon King Theory is used to identify outlier events that can have a catastrophic impact on financial systems and markets, helping investors and risk managers prepare for extreme but predictable events.

Example

The 2008 financial crisis could be considered a dragon king event, where systemic issues in the housing market led to an extreme financial collapse.