Theblack swan theory ortheory of black swan events is ametaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit ofhindsight. The term is based on a Latin expression which presumed thatblack swans did not exist. The expression was used until around 1697 when Dutch mariners saw black swans living in Australia. After this, the term was reinterpreted to mean an unforeseen and consequential event.[1]
The reinterpreted theory was developed byNassim Nicholas Taleb, starting in 2001, to explain:
Taleb's "black swan theory" (which differs from the earlier philosophical versions of the problem) refers only to statistically unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extremeoutliers, collectively play vastly larger roles than regular occurrences.[2]: xxi More technically, in the scientificmonograph "Silent Risk",[3] Taleb mathematically defines the black swan problem as "stemming from the use of degeneratemetaprobability".[3]
The phrase "black swan" derives from a Latin expression; its oldest known occurrence is from the 2nd-century Roman poetJuvenal's characterization in hisSatire VI of something being "rara avis in terris nigroque simillima cygno" ("a bird as rare upon the earth as a black swan").[4]: 165 [5][6] When the phrase was coined, theblack swan was presumed by Romans not to exist.[1] The importance of the metaphor lies in its analogy to the fragility of any system of thought.[clarification needed] 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.[7] The London expression derives from theOld World presumption that allswans must be white because all historical records of swans reported that they had white feathers.[8] In that context, ablack swan was impossible or at least nonexistent.
However, in 1697, Dutch explorers led byWillem de Vlamingh became thefirst Europeans to see black swans, inWestern Australia.[1] The term subsequently metamorphosed to connote the idea that a perceived impossibility might later be disproved. Taleb notes that in the 19th century,John Stuart Mill used theblack swan logical fallacy as a new term to identifyfalsification.[9]
Black swan events were discussed by Taleb in his 2001 bookFooled By Randomness, which concerned financial events. His 2007 bookThe Black Swan extended the metaphor to events outsidefinancial 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, thedissolution of the Soviet Union, and theSeptember 11, 2001 attacks as examples of black swan events.[2]: prologue
Taleb asserts:[10]
What we call here a Black Swan (and capitalize it) is an event with the following three attributes.
First, it is anoutlier, 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 occurrenceafter the fact, making it explainable and predictable.
I stop and summarize the triplet: rarity, extreme 'impact', and retrospective (though not prospective) predictability. 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.
Based on the author's criteria:
According to Taleb, theCOVID-19 pandemic was not a black swan, as it was expected with great certainty that a global pandemic would eventually take place.[11][12] Instead, it is considered awhite swan—such an event has a major effect, but is compatible with statistical properties.[11][12]
The practical aim of Taleb's book is not to attempt to predict events which are unpredictable, but to buildrobustness 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, andquantitative finance in particular, Taleb critiques the widespread use of thenormal distribution model employed infinancial engineering, calling it aGreat Intellectual Fraud. Taleb elaborates the robustness concept as a central topic of his later book,Antifragile: Things That Gain From Disorder.
In the second edition ofThe Black Swan, Taleb provides "Ten Principles for a Black-Swan-Robust Society".[2]: 374–78 [13]
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 to "turn the Black Swans white".[14]
Taleb claims that his black swan is different from the earlier philosophical versions of the problem, specifically inepistemology (as associated withDavid Hume,John Stuart Mill,Karl Popper, and others), as it concerns a phenomenon with specific statistical properties which he calls, "the fourth quadrant".[15]
Taleb's problem is about epistemic limitations in some parts of the areas covered in decision making. These limitations are twofold: philosophical (mathematical) and empirical (human-known) epistemic biases. The philosophical problem is about the decrease in knowledge when it comes to rare events because these are not visible in past samples and therefore require a stronga priori (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.[citation needed]
According to Taleb, thinkers who came before him who dealt with the notion of the improbable (such as Hume, Mill, and Popper) focused on theproblem of induction in logic, specifically, that of drawing general conclusions from specific observations.[16] The central and unique attribute of Taleb's black swan event is that it is high-impact. His claim is that almost all consequential events in history come from the unexpected – yet humans later convince themselves that these events are explainable inhindsight.[citation needed]
One problem, labeled theludic 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 anormal distribution. These concerns often are highly relevant in financial markets, where major players sometimes assume normal distributions when usingvalue at risk models, although market returns typically havefat tail distributions.[17]
Taleb said:[10]
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 anordinary 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. Why? Because the bell curve ignores large deviations, cannot handle them, yet makes us confident that we have tamed uncertainty. Its nickname in this book is GIF, Great Intellectual Fraud.
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". For instance, a simple model of daily stock market returns may include extreme moves such asBlack Monday (1987), but might not model the breakdown of markets following the September 11, 2001 attacks. Consequently, theNew York Stock Exchange andNasdaq exchange remained closed till September 17, 2001, the most protracted shutdown since the Great Depression.[18] A fixed model considers the "known unknowns", but ignores the "unknown unknowns", made famous by a statement ofDonald Rumsfeld.[19] The term "unknown unknowns" appeared in a 1982New Yorker article on the aerospace industry, which cites the example ofmetal fatigue, the cause ofcrashes in Comet airliners in the 1950s.[20]
Deterministicchaotic dynamics reproducing the Black Swan Event have been researched in economics.[21] That is in agreement with Taleb's comment regarding some distributions which are not usable with precision, but which are more descriptive, such as thefractal,power law, or scalable distributions and that awareness of these might help to temper expectations.[22] Beyond this, Taleb emphasizes that many events simply are without precedent, undercutting the basis of this type of reasoning altogether.[citation needed]
Taleb also argues for the use ofcounterfactual reasoning when considering risk.[10]: p. xvii [23]
'Do you say no worthy wife is to be found among all these crowds?' Well, let her be handsome, charming, rich and fertile; let her have ancient ancestors ranged about her halls; let her be more chaste than the dishevelled Sabine maidens who stopped the war—a prodigy as rare upon the earth as a black swan!
'nullane de tantis gregibus tibi digna uidetur?' sit formonsa, decens, diues, fecunda, uetustos porticibus disponat auos, intactior omni crinibus effusis bellum dirimente Sabina, rara auis in terris nigroque simillima cycno
Taleb: In fact, I tried in The Black Swan to turn a lot of black swans white! That's why I kept going on and on against financial theories, financial-risk managers, and people who do quantitative finance.
