Loading the player...

What is a 'Black Swan'

A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict. Black swan events are typically random and unexpected.

BREAKING DOWN 'Black Swan'

The term was popularized by Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader.

The idea of a black swan event was pioneered by the finance professional turned writer Nassim Nicholas Taleb after the results of the 2008 financial crisis. Taleb argued that black swan events are impossible to predict yet have catastrophic ramifications. Therefore, it is important for people to always assume a black swan event is a possibility, whatever it may be, and to plan accordingly. He also used the 2008 financial crisis and the idea of black swan events to point out that if a broken system is allowed to fail, it actually strengthens it against the catastrophe of future black swan events.

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 spent 21 years on Wall Street as a quant trader, developing the computer models for financial institutions. Since that time, he has written a long-form essay broken into three books: The Black Swan: The Impact of the Highly Improbable, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, and Antifragile: Things That Gain from Disorder. He has been a distinguished professor of risk engineering at NYU's School of Engineering and written over 45 peer-reviewed papers.

Examples of Past Black Swan Events

The financial crash of the U.S. housing market during the 2008 crisis is one of the most recent and well-known black swan events as of 2017. The effect of the crash was catastrophic and global, and only a few outliers were able to predict it happening.

Also in 2008, Zimbabwe had the worst case of hyperinflation in the 21st century with a peak inflation rate of more than 79.6 billion percent. An inflation level of that amount is nearly impossible to predict and can easily ruin a country financially.

The dot-com bubble of 2001 is another black swan event that has similarities to the 2008 financial crisis. America was enjoying rapid economic growth and increases in private wealth before the economy catastrophically collapsed. Since the Internet was at its infancy in terms of commercial use, various investment funds were investing in technology companies with inflated valuations and no market traction. When these companies folded, the funds were hit hard, and the downside risk was passed onto the investors. The digital frontier was new and, therefore, it was nearly impossible to predict the collapse.

As another example, the previously successful hedge fund, Long Term Capital Management (LTCM), was driven into the ground in 1998 as a result of the ripple effect caused by the Russian government's debt default, something the company's computer models could not have predicted.

RELATED TERMS
  1. Grey Swan

    A grey swan is an event that is possible and known, and is potentially ...
  2. Black Market

    A black market is economic activity that takes place outside ...
  3. Black Money

    Black money is payment from illegal activity, usually received ...
  4. Black Thursday

    Black Thursday is the name for Thursday, Oct. 24, 1929, when ...
  5. Black Box Accounting

    Black box accounting is a method to obscure financial reporting ...
  6. October Effect

    The October effect is a theory that stocks tend to decline during ...
Related Articles
  1. Investing

    Don't Freak Out Over Black Swans; Be Prepared

    Could 2016 be a big year for black swans? Who knows? Here's what black swans are, how they can devastate the unprepared, and how the prepared can emerge unscathed.
  2. Investing

    Black Swan Events and Investment

    Black swans are world-changing events that are rare and difficult to predict, but they have serious implications for your investments.
  3. Investing

    4 of the Most Shocking Stock Increases and Falls

    When a black swan event occurs, a market correction of massive proportions ensues.
  4. Investing

    Nassim Taleb Believes Market Crash on Horizon

    Nassim Taleb, who coined the phrase Black Swan, is bearish right now. Here's why.
  5. Insights

    Investopedia Readers Search for Black Swans in the Election

    As people wake up to the stunning 2016 presidential election result, here's what our readers are searching.
  6. Insights

    Black Swans Pose a Bigger Risk to Markets in 2017

    North Korea Nuclear Risk: Barclays sees 13 major events that could disrupt the markets this year
  7. Investing

    Intel's Interim CEO Doesn't Want the Permanent Job

    Intel is challenged with finding a replacement for its latest CEO, who resigned following a relationship that violated company policy.
  8. Financial Advisor

    4 Ways To Invest In Oil

    Many investors are looking for a way to invest in oil. Find out how you can buy into black gold.
  9. Investing

    How To Spot A Sell-Off

    The ability to identify a sell-off can be an extremely reliable resource to have in a time of market uncertainty.
  10. Investing

    Can the Market Rally Continue for Another 10 Years?

    Stocks are always at risk of crashing simply because that is the nature of the market.
RELATED FAQS
  1. How is the stock market affected by Thanksgiving and Black Friday?

    Thanksgiving and Black Friday sales numbers are considered to be important indicators for stock market activity throughout ... Read Answer >>
  2. What caused Black Monday: The stock market crash of 1987?

    Find out about the factors behind the stock market crash of 1987, also known as Black Monday, when the Dow Jones Industrial ... Read Answer >>
  3. What caused the Stock Market Crash of 1929 that led to the Great Depression?

    Find out what led to the stock market crash of 1929, which in turn fueled the Great Depression, sparking a nearly 90% loss ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center