Black Swan

A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict. Black swan events are typically random and unexpected.

The term was popularized by Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader.

The idea of a black swan event was pioneered by the finance professional turned writer Nassim Nicholas Taleb after the results of the 2008 financial crisis. Taleb argued that black swan events are impossible to predict yet have catastrophic ramifications. Therefore, it is important for people to always assume a black swan event is a possibility, whatever it may be, and to plan accordingly. He also used the 2008 financial crisis and the idea of black swan events to point out that if a broken system is allowed to fail, it actually strengthens it against the catastrophe of future black swan events.

Taleb states that a black swan event depends on the observer. For example, what may be a black swan surprise for a turkey is not a black swan surprise to its butcher; hence the objective should be to "avoid being the turkey" by identifying areas of vulnerability in order to "turn the Black Swans white".

Taleb spent 21 years on Wall Street as a quant trader, developing the computer models for financial institutions. Since that time, he has written a long-form essay broken into three books: The Black Swan: The Impact of the Highly Improbable, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, and Antifragile: Things That Gain from Disorder. He has been a distinguished professor of risk engineering at NYU's School of Engineering and written over 45 peer-reviewed papers.

The financial crash of the U.S. housing market during the 2008 crisis is one of the most recent and well-known black swan events as of 2017. 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 dot-com 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 onto the investors. The digital frontier was new and, therefore, 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.