Black Swan Theory - Background

Background

Black swan events were introduced by Nassim Nicholas Taleb in his 2004 book Fooled By Randomness, which concerned financial events. His 2007 book (revised and completed in 2010) 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, and the September 11 attacks as examples of black swan events.

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, very much like a black swan") (6.165). In English, when the phrase was coined, the black swan was presumed not to exist. The importance of the simile 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 phrase's underlying logic, 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. In that context, a black swan was impossible or at least nonexistent. After Dutch explorer Willem de Vlamingh discovered black swans in Western Australia in 1697, the term metamorphosed to connote that a perceived impossibility might later be disproven. Taleb notes that in the 19th century John Stuart Mill used the black swan logical fallacy as a new term to identify falsification.

Specifically, Taleb asserts in the New York Times:

"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: 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."