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Black Swan Event

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Definition of 'Black Swan Event'

A Black Swan Event (also known as Black Swan Theory or Theory of Black Swan Events) was first explained by Nassim Nicholas Taleb in his book The Black Swan (The Impact of the Highly Improbable).

A Black Swan Event is used to explain:
  1. The disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology.
  2. The non-computability of the probability of the consequential rare events using scientific methods (owing to their very nature of small probabilities)
  3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs.

Black Swan Events are considered extreme outliers and collectively they play vastly larger roles than regular occurring events.

Examples of Black Swan Events:
  • The rise of the Internet.
  • The personal computer
  • World War I
  • September 11 Attacks

The term Black Swan was coined in the 16th century when it was believed that black swans did not exist and thus a black swan was an impossibility. Later when black swans were discovered in Western Australia the term metamorphosed to indicate an impossible event which may later be dis-proven.

Nassim Nicholas Taleb's ten principles for a black swan robust world:
  1. What is fragile should break early while it is still small. Nothing should ever become Too Big to Fail.
  2. No socialization of losses and privatization of gains.
  3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
  4. Do not let someone making an "incentive" bonus manage a nuclear plant – or your financial risks.
  5. Counter-balance complexity with simplicity.
  6. Do not give children sticks of dynamite, even if they come with a warning.
  7. Only Ponzi schemes should depend on confidence. Governments should never need to "restore confidence".
  8. Do not give an addict more drugs if he has withdrawal pains.
  9. Citizens should not depend on financial assets or fallible "expert" advice for their retirement.
  10. Make an omelet with the broken eggs.

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