"Black swan" is a financial/economic term and has nothing to do with terrorism.
Black Swan in the Stock Market: What Is It, With Examples and History
What Is a Black Swan?
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.1
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Investopedia / Michela Buttignol
Understanding a Black Swan
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.1 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.1
Taleb describes a black swan as an event that:
- 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 predictable1