A Black Swan event is thankfully not all that common, but when they do arrive, they turn everything in the markets upside down. Let's take a look at them.
A Black Swan event is something significant that takes you (and everyone else) by surprise. The original phrase, Black Swan can be traced back to the Roman poet Juvenal, who first used it to describe something very rare indeed.
Contemporary usage of Black Swan Event has been bolstered by statistician and trader Nassim Nicholas Taleb. His 2007 book was called The Black Swan: The Impact of Highly Improbable, and in it, he attached the term to a theory that relates to trading. He noted that an unexpected Black Swan Event has a profound effect on the market and that this event can be distinguished by three primary features:
- A Black Swan event defies regular expectations. It comes out of the blue and there's no way that you could have predicted its arrival simply by looking at past events.
- Its impact is always highly significant, seismic in fact, like a brick hitting the center of a still pond and the ripples expanding in all directions.
- Despite all of this there will be a perfectly rational explanation for the event, and once you understand what caused the Black Swan Event this time around, you'll be able to anticipate future occurrences, or at least their impact, more easily.
Taleb says that we can think of things like the 9/11 attacks, the fall of the Soviet Union, and the rise of the World Wide Web as Black Swan events.