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 an ancient saying which presumed black swans did not exist, but the saying was rewritten after black swans were discovered in the wild.
The theory was developed by Nassim Nicholas Taleb to explain:. Unlike the earlier and broader "black swan problem" in philosophy i. Such events, considered extreme outliers , collectively play vastly larger roles than regular occurrences. The phrase "black swan" derives from a Latin expression; its oldest known occurrence is the poet Juvenal 's characterization of something being " rara avis in terris nigroque simillima cygno " "a rare bird in the lands and very much like a black swan".
The importance of the metaphor lies in its analogy to the fragility of any system of thought. A set of conclusions is potentially undone once any of its fundamental postulates is disproved. In this case, the observation of a single black swan would be the undoing of the logic of any system of thought, as well as any reasoning that followed from that underlying logic.
Juvenal's phrase was a common expression in 16th century London as a statement of impossibility. The London expression derives from the Old World presumption that all swans must be white because all historical records of swans reported that they had white feathers. However, in , Dutch explorers led by Willem de Vlamingh became the first Europeans to see black swans , in Western Australia.
Taleb notes that in the 19th century, John Stuart Mill used the black swan logical fallacy as a new term to identify falsification. Black swan events were discussed by Nassim Nicholas Taleb in his book Fooled By Randomness , which concerned financial events.
His book The Black Swan extended the metaphor to events outside of financial markets. Taleb regards almost all major scientific discoveries, historical events, and artistic accomplishments as "black swans"—undirected and unpredicted. He gives the rise of the Internet , the personal computer , World War I , the dissolution of the Soviet Union , and the September 11, attacks as examples of black swan events. What we call here a Black Swan and capitalize it is an event with the following three attributes.
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme 'impact'. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
I stop and summarize the triplet: A small number of Black Swans explains almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives.
The practical aim of Taleb's book is not to attempt to predict events which are unpredictable, but to build robustness against negative events while still exploiting positive events. Taleb contends that banks and trading firms are very vulnerable to hazardous black swan events and are exposed to unpredictable losses.
On the subject of business, and quantitative finance in particular, Taleb critiques the widespread use of the normal distribution model employed in financial engineering , calling it a Great Intellectual Fraud.
Taleb elaborates the robustness concept as a central topic of his later book, Antifragile: Things That Gain From Disorder. 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's black swan is different from the earlier philosophical versions of the problem, specifically in epistemology , as it concerns a phenomenon with specific empirical and statistical properties which he calls, "the fourth quadrant". Taleb's problem is about epistemic limitations in some parts of the areas covered in decision making. These limitations are twofold: The philosophical problem is about the decrease in knowledge when it comes to rare events as these are not visible in past samples and therefore require a strong a priori , or an extrapolating theory; accordingly predictions of events depend more and more on theories when their probability is small.
In the fourth quadrant, knowledge is uncertain and consequences are large, requiring more robustness. According to Taleb,  thinkers who came before him who dealt with the notion of the improbable, such as Hume , Mill , and Popper focused on the problem of induction in logic, specifically, that of drawing general conclusions from specific observations. The central and unique attribute of Taleb's black swan event is its high-profile.
His claim is that almost all consequential events in history come from the unexpected — yet humans later convince themselves that these events are explainable in hindsight.
One problem, labeled the ludic fallacy by Taleb, is the belief that the unstructured randomness found in life resembles the structured randomness found in games. This stems from the assumption that the unexpected may be predicted by extrapolating from variations in statistics based on past observations, especially when these statistics are presumed to represent samples from a normal distribution. These concerns often are highly relevant in financial markets, where major players sometimes assume normal distributions when using value at risk models, although market returns typically have fat tail distributions.
Taleb said "I don't particularly care about the usual. If you want to get an idea of a friend's temperament, ethics, and personal elegance, you need to look at him under the tests of severe circumstances, not under the regular rosy glow of daily life. Can you assess the danger a criminal poses by examining only what he does on an ordinary day? Can we understand health without considering wild diseases and epidemics? Indeed the normal is often irrelevant.
Almost everything in social life is produced by rare but consequential shocks and jumps; all the while almost everything studied about social life focuses on the 'normal,' particularly with 'bell curve' methods of inference that tell you close to nothing. Because the bell curve ignores large deviations, cannot handle them, yet makes us confident that we have tamed uncertainty. More generally, decision theory , which is based on a fixed universe or a model of possible outcomes, ignores and minimizes the effect of events that are "outside the model".
A fixed model considers the "known unknowns", but ignores the " unknown unknowns ", made famous by a statement of Donald Rumsfeld. Taleb notes that other distributions are not usable with precision, but often are more descriptive, such as the fractal , power law , or scalable distributions and that awareness of these might help to temper expectations.
Beyond this, he emphasizes that many events simply are without precedent, undercutting the basis of this type of reasoning altogether. Taleb also argues for the use of counterfactual reasoning when considering risk. From Wikipedia, the free encyclopedia. The theory was developed by Nassim Nicholas Taleb to explain: The disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology. The non-computability of the probability of the consequential rare events using scientific methods owing to the very nature of small probabilities.
The psychological biases that blind people, both individually and collectively, to uncertainty and to a rare event's massive role in historical affairs. Bad beat Butterfly effect Deus ex machina Dragon king theory Elephant in the room Extreme risk Global catastrophic risks Hindsight bias Holy grail distribution Kurtosis risk List of cognitive biases Miracle Normal accidents Normalcy bias Outside Context Problem Popper's solution to the black swan problem in science Quasi-empiricism in mathematics Randomness Rare events Taleb distribution Technological singularity The Long Tail There are known knowns Uncertainty Wild card foresight.
Retrieved 23 May The American Journal of Philology. Johns Hopkins University Press. Retrieved 20 January Curriculum, archived from the original on The Impact of the Highly Improbable". The New York Times. In fact, I tried in The Black Swan to turn a lot of black swans white! The Impact of the Highly Improbable 1st ed. Myer, February 12, Mispriced risk tests market faith in a prized formula".