The term/concept Black Swan was popularised 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, before the events of the 2008 financial crisis.
Taleb argued that, because black swan events are impossible to predict due to their extreme rarity and have catastrophic consequences, it is important for people and companies to assume that a black swan event is a real possibility and to plan accordingly for such a circumstance.
Later, Taleb used the 2008 financial crisis and the idea of black swan events to argue that, if a system fails because of such an exceptional and catastrophic cause, despite the severe consequences it may ultimately become stronger and more resistant to the catastrophe of future black swan events.
He also argued that a system that is balanced and insulated from risk becomes more vulnerable to catastrophic losses during rare and unpredictable events.
Taleb describes a black swan as an event that:
- lies beyond normal expectations because it is so rare that even the possibility of its occurrence is undetectable;
- has a catastrophic impact when it occurs;
- is explained retrospectively as though it had actually been predictable.
For extremely rare events, Taleb argues that standard probability and forecasting tools, such as the normal distribution, do not apply because they depend on large populations and historical sample sizes that, by definition, are never available for rare events.
Extrapolating from statistics based on observations of past events is not useful for predicting black swans and may even lead us to make decisions that leave us more vulnerable to such phenomena.
The inability to predict black swans is only tragic because such events can have such serious consequences. If they were inconsequential events, despite being unpredictable, they would obviously be far less interesting.
A key aspect of a black swan is the fact that, because it is historically significant, it generates disproportionate interest in understanding it, with a multitude of observers attempting to explain it and, after the event, speculating about the ways in which it might have been predicted. Unfortunately, according to Taleb, this retrospective speculation does not help us predict black swans.
Paulo Fidalgo
CEO of Marketividade
