A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.
Black swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.
Key Takeaways
A black swan is an extremely rare event with severe consequences.
It cannot be predicted beforehand, though after the fact, many falsely claim it should have been predictable.
Black swan events can cause catastrophic damage to an economy by negatively impacting markets and investments, but even the use of robust modeling cannot prevent a black swan event.
Reliance on standard forecasting tools can both fail to predict and potentially increase vulnerability to black swans by propagating risk and offering false security.
The term was popularized by the book, The Black Swan, by Nassim Nicholas Taleb.
The term was popularized by Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader. Taleb wrote about the idea of a black swan event in a 2007 book prior to the events of the 2008 financial crisis. Taleb argued that because black swan events are impossible to predict due to their extreme rarity, yet have catastrophic consequences, it is important for people to always assume a black swan event is a possibility, whatever it may be, and to try to plan accordingly. Some believe that diversification may offer some protection when a black swan event does occur.
Taleb later used the 2008 financial crisis and the idea of black swan events to argue that if a broken system is allowed to fail, it actually strengthens it against the catastrophe of future black swan events. He also argued that conversely, a system that is propped up and insulated from risk ultimately becomes more vulnerable to catastrophic loss in the face of rare, unpredictable events.
Is so rare that even the possibility that it might occur is unknown
Has a catastrophic impact when it does occur
Is explained in hindsight as if it were actually predictable
Special Considerations
For extremely rare events, Taleb argues that the standard tools of probability and prediction, such as the normal distribution, do not apply since they depend on large population and past sample sizes that are never available for rare events by definition. Extrapolating, using statistics based on observations of past events is not helpful for predicting black swans, and might even make us more vulnerable to them.
The last key aspect of a black swan is that as a historically important event, observers are keen to explain it after the fact and speculate as to how it could have been predicted. Such retrospective speculation, however, does not actually help to predict future black swans as these can be anything from a credit crisis to a war.
Examples of Past Black Swan Events
The crash of the U.S. housing market during the 2008 financial crisis is one of the most recent and well-known black swan events. The effect of the crash was catastrophic and global, and only a few outliers were able to predict it happening.
Also in 2008, Zimbabwe had the worst case of hyperinflation in the 21st century with a peak inflation rate of more than 79.6 billion percent. An inflation level of that amount is nearly impossible to predict and can easily ruin a country financially.
The dotcom bubble of 2001 is another black swan event that has similarities to the 2008 financial crisis. America was enjoying rapid economic growth and increases in private wealth before the economy catastrophically collapsed. Since the Internet was at its infancy in terms of commercial use, various investment funds were investing in technology companies with inflated valuations and no market traction. When these companies folded, the funds were hit hard, and the downside risk was passed on to the investors. The digital frontier was new so it was nearly impossible to predict the collapse.
As another example, the previously successful hedge fund Long-Term Capital Management (LTCM), was driven into the ground in 1998 as a result of the ripple effect caused by the Russian government's debt default, something the company's computer models could not have predicted.
A more recent example could be the emergence of the COVID-19 virus that caused a global pandemic beginning in the Spring of 2020, and which disrupted markets and global economies around the world.
What Is a Black Swan Event in the Stock Market?
A black swan event in the stock market is often a market crash that exceeds six standard deviations, making it exceedingly rare from a probabilistic standpoint. Some have argued that stock prices are "fat-tailed" and that such events are, in reality, more frequent than the statistics would let on.
Why Do They Call It a Black Swan Event?
A black swan is considered to be rare, since most swans are white. In fact, the story goes that black swans were thought once to not at all exist, until finally one was discovered. The lesson is that what we think are very rare events may be more common than previously thought.
What Is a Grey Swan Event?
A grey swan event is an outlier, but which is more probably than a black swan. As a result, people can better prepare for and hedge against a grey swan than for a black swan.
The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. The term is based on a Latin expression which presumed that black swans did not exist.
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are characterized by their extreme rarity, severe impact, and the widespread insistence that they were obvious in hindsight. One frequently cited example of a black swan event was the housing market crash of 2008, which led to the Great Recession.
The Great Depression (1929): The stock market crash of 1929, followed by the Great Depression, is a prime example of a Black Swan event. A confluence of factors, including unregulated margin trading, a speculative bubble, and protectionist economic policies, contributed to the crash.
Before the COVID-19 outbreak, the most notable example (in recent years) of a black swan event was the Global Financial Crisis of 2008, precipitated by the sudden, severe crash of what had previously been a booming housing market.
The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.
Black swan events can theoretically be good or bad or neutral. In the real world, however, the term is often used to describe events with negative impacts, such as financial crashes, widespread service outages, and even natural disasters and terrorism.
One frequently cited example of a black swan event was the housing market crash of 2008, which led to the Great Recession. Other examples include the COVID-19 pandemic, the terrorist attacks of Sept. 11, and the hyperinflation crisis in Zimbabwe.
The 1987 crash on stocks represents a black swan event in financial markets. On Monday, October 19, 1987, the Dow Jones Industrial shares dropped 22.6% — the biggest single-day loss in history.
The black swan (Cygnus atratus) is a large waterbird, a species of swan which breeds mainly in the southeast and southwest regions of Australia. Within Australia, the black swan is nomadic, with erratic migration patterns dependent on climatic conditions.
The film Black Swan, with costumes by Rodarte, had an enormous impact on fashion. Natalie Portman The Black Swan Oscar winner rapped on SNL with The Lonely Island. The Fountain was one long fight, The Wrestler was divorce, and then we reconciled on Black Swan.
Definition: The Black Swan Theory refers to those events which are difficult to predict in the normal course of business. They are random, unexpected, but high-impact events. These events are considered outliers, because there is no past data which can point towards its occurrence in the foreseeable future.
Some examples of Black Swan events include World Wars I and II, the fall of the Berlin Wall, 9/11, the rise of the Internet, the stock-market crash of 1987, and the 2008 financial crisis.
In summary, “The Black Swan” by Nassim Nicholas Taleb teaches us about the impact of unforeseen events and the importance of being prepared for them. Taleb's book encourages us to question our assumptions about predictability and control.
A black swan event is an unpredictable and rare event with an extreme, paradigm-shifting impact on the wider world. Think of the September 11 attacks, the 2008 financial crisis, and other moments of sudden tragedy and panic that echo throughout history.
The nature of a black swan is that it can't be predicted. We can suggest examples to help understand the concept, though. An example positive black swan would be if Google developed a superhuman AI next year due to a research breakthrough. An example negative black swan would be a catastrophic world economy collapse.
BCA Research sketches out how such events could roil the markets—and the world. A nuclear face-off between the U.S. and Russia, a Chinese recession, military skirmishes in Asia, a missile strike on the Strait of Gibraltar—and a woman as U.S. president.
In the long term, they can reshape economic landscapes, trigger recessions, and alter investor behaviour. One example of a black swan event is the 2008 global financial crisis. It was triggered by the collapse of Lehman Brothers, a major investment bank, which sent shockwaves throughout the global financial system.
Introduction: My name is Tyson Zemlak, I am a excited, light, sparkling, super, open, fair, magnificent person who loves writing and wants to share my knowledge and understanding with you.
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