- Money Mentor
The Meaning of a Black Swan Event
Updated: Sep 19, 2022
The black swan metaphor, popularized by Nassim Nicholas Taleb in his book The Black Swan: The Impact of the Highly Improbable, refers to events that have an enormous impact despite their unusual nature, hence their black swan designation.
This term has been widely adopted by those within finance and statistics, but in this guide we’ll define the meaning of a black swan event and provide an example to help you better understand it as well as its applications in your everyday life and investments.
What is a Black Swan Event?
A black swan event is an unexpected and highly impactful event that can be hard to predict. In his 2007 book, The Black Swan: The Impact of Highly Improbable Outcomes, Nassim Nicholas Taleb explains that in theory, a risk manager should design his or her policies so that one-half or less is exposed to tail risk (black swan events).
A black swan event occurs when some random event occurs out of left field which changes things in ways nobody could have predicted; it’s typically associated with catastrophic results.
It’s not impossible for a black swan event to occur—they just happen rarely.
According to Taleb, there are three types of black swans: positive (or white), negative (or gray), and neutral.
Positive black swans are rare but pleasant surprises that make you feel lucky, like winning £1 million in a lottery or getting engaged while on vacation.
Negative black swans are rare but unpleasant surprises like getting into a car accident on your way home from work or breaking your leg while hiking up a mountain.
Examples of Black Swan Events
History is littered with black swan events. The fall of Rome, World War I, and 9/11 are all examples where an event which was not fully understood or predicted by experts in advance significantly changed lives as we knew them.
The Great Depression, for example, wasn’t forecasted by economists. It just happened one day, taking years to recover from its effects.
The Covid 19 pandemic was a recent black swan event that sent world stock markets plunging, and event the recent Russian war with Ukraine could be classed as such.
With hindsight being 20/20 it's easy to say that experts could have predicted these major events in advance -- but they didn't; at least not anyone who had enough information to make such bold claims.
If you're looking for an example closer to home, consider what would happen if someone told you that your job was going away tomorrow because their company had developed a new technology that allowed them to do your job more efficiently than you.
That's exactly what happened to Kodak employees when digital cameras were invented and Kodak refused to adapt quickly enough. They were blindsided by something no one saw coming -- even though it should have been obvious.
As history has shown us time and again, there will always be unforeseen challenges in life, both personally and professionally.
This isn't meant to scare you into inaction; rather, it's meant to encourage you to take action now so that when unexpected things happen down the road (and they will), you'll be prepared for whatever comes next!
Who are the winners in a black swan event?
Some, but not all black swan events are negative. For example, when Apple launched the iPod and iTunes, it was clear that their music-selling platform would make millions.
What wasn’t obvious was how popular Apple would become as a phone maker or what impact that would have on other companies like Nokia and Motorola.
While some black swan events are positive for individuals or groups (such as employees), more often than not they’re negative for at least one group (for example, people holding stocks).
The only way to mitigate your risk is to seek out expert opinions from a variety of credible sources before making big decisions—that way you can get different perspectives and avoid being blindsided by seemingly unlikely possibilities.
What can we do now?
Every so often, an event occurs that changes things for everybody in ways that are hard to predict. The 9/11 attacks were such an event—not just for those who experienced them but also for people around the world who found themselves under attack soon after.
The internet was built with such events in mind and we need to build more resilient networks and systems now. The question is not whether we can make our existing infrastructure secure, but how best to prepare ourselves when—and not if—the next big black swan event happens.
The Meaning of a Black Swan Event - The Bottom Line
A black swan event is an unpredictable and largely unpredicted situation—but that doesn’t mean we can’t act to keep things from getting out of hand.
Buy & Read Nassim Nicholas Taleb's book The Black Swan on Amazon:
The Impact of the Highly Improbable, is to make sure you have adequate insurance coverage for every risk that comes your way.
For example, if there’s one catastrophe for which it seems impossible to find insurance, it’s an epidemic or pandemic.
Nevertheless, such risks are actually insurable under certain circumstances; according to Taleb's research, covering such events makes business sense even in today's economy