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Table of Contents
What is a Black Swan?How Does a Black Swan Work?Black Swan Academic Research ArticlesWhat is a Black Swan?
Primarily used in finance, a black swan refers to rare, unexpected events that affect financial markets, such as the financial collapse of 2007-8.
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How Does a Black Swan Work?
Finance researcher, investor and professor Nassim Taleb introduced the concept of the Black Swan in his Book The Black Swan: The Impact of the Highly Improbable. He wrote that random, unexpected events, or Black Swans, were near impossible to predict and could have catastrophic effect on the market. Therefore, investors should plan for the (rare) occurrences of Black Swans. Those who have identified and addressed vulnerabilities in the market may even turn a black swan into a white swan! Taleb argues, then, that Black Swans ultimately strengthen the system: flawed systems fail, stronger ones simply take a step back. The financial market collapse of 2007-8 was a recent Black Swan, leading to devastating impact on U.S. and world economies. In the early 2000s, another Black Swan occurred with the dot com bubble, where investors shoveled funds in the undeveloped internet industry. Long Term Capital Management, a U.S.-based hedge fund, collapsed because of unexpected default in debt instruments put out by the Russian government. None of these events were foreseen by investors or models.