Blackswantheory

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Theblackswantheoryortheoryofblackswaneventsisametaphorthatdescribesaneventthatcomesasa
surprise,hasamajoreffect,andisofteninappropriatelyrationalizedafterthefactwiththebenefitofhindsight.
Thetermisbasedonanancientsayingwhichpresumedblackswansdidnotexist,butthesayingwasrewritten
afterblackswanswerediscoveredinthewild.

ThetheorywasdevelopedbyNassimNicholasTalebtoexplain:

1.Thedisproportionateroleofhighprofile,hardtopredict,andrareeventsthatarebeyondtherealmof
normalexpectationsinhistory,science,finance,andtechnology.
2.Thenoncomputabilityoftheprobabilityoftheconsequentialrareeventsusingscientificmethods
(owingtotheverynatureofsmallprobabilities).
3.Thepsychologicalbiaseswhichblindpeople,bothindividuallyandcollectively,touncertaintyandtoa
rareevent'smassiveroleinhistoricalaffairs.

Unliketheearlierandbroader"blackswanproblem"inphilosophy(i.e.theproblemofinduction),Taleb's
"blackswantheory"refersonlytounexpectedeventsoflargemagnitudeandconsequenceandtheirdominant
roleinhistory.Suchevents,consideredextremeoutliers,collectivelyplayvastlylargerrolesthanregular
occurrences.[1]:xxiMoretechnically,inthescientificmonograph'SilentRisk',[2]Talebmathematicallydefines
theblackswanproblemas"stemmingfromtheuseofdegeneratemetaprobability".[2]

Contents
1 Background
2 Identifyingablackswanevent
3 Copingwithblackswanevents
4 Epistemologicalapproach
5 Seealso
6 References
7 Bibliography
8 Externallinks

Background
Thephrase"blackswan"derivesfromaLatinexpressionitsoldestknownoccurrenceisthepoetJuvenal's
characterizationofsomethingbeing"raraavisinterrisnigroquesimillimacygno"("ararebirdinthelandsand
verymuchlikeablackswan").[3]:165Whenthephrasewascoined,theblackswanwaspresumednottoexist.
Theimportanceofthemetaphorliesinitsanalogytothefragilityofanysystemofthought.Asetof
conclusionsispotentiallyundoneonceanyofitsfundamentalpostulatesisdisproved.Inthiscase,the
observationofasingleblackswanwouldbetheundoingofthelogicofanysystemofthought,aswellasany
reasoningthatfollowedfromthatunderlyinglogic.

Juvenal'sphrasewasacommonexpressionin16thcenturyLondonasastatementofimpossibility.TheLondon
expressionderivesfromtheOldWorldpresumptionthatallswansmustbewhitebecauseallhistoricalrecords
ofswansreportedthattheyhadwhitefeathers.[4]Inthatcontext,ablackswanwasimpossibleoratleast
nonexistent.
However,in1697,DutchexplorersledbyWillemdeVlaminghbecamethefirstEuropeanstoseeblackswans,
inWesternAustralia.[5]Thetermsubsequentlymetamorphosedtoconnotetheideathataperceived
impossibilitymightlaterbedisproven.Talebnotesthatinthe19thcentury,JohnStuartMillusedtheblack
swanlogicalfallacyasanewtermtoidentifyfalsification.[6]

BlackswaneventswerediscussedbyNassimNicholasTalebinhis2001bookFooledByRandomness,which
concernedfinancialevents.His2007bookTheBlackSwanextendedthemetaphortoeventsoutsideof
financialmarkets.Talebregardsalmostallmajorscientificdiscoveries,historicalevents,andartistic
accomplishmentsas"blackswans"undirectedandunpredicted.HegivestheriseoftheInternet,thepersonal
computer,WorldWarI,dissolutionoftheSovietUnion,andtheSeptember2001attacksasexamplesofblack
swanevents.[1]:prologue

Talebasserts:[7]

WhatwecallhereaBlackSwan(andcapitalizeit)isaneventwiththefollowingthreeattributes.

First,itisanoutlier,asitliesoutsidetherealmofregularexpectations,becausenothinginthepast
canconvincinglypointtoitspossibility.Second,itcarriesanextreme'impact'.Third,inspiteofits
outlierstatus,humannaturemakesusconcoctexplanationsforitsoccurrenceafterthefact,making
itexplainableandpredictable.

Istopandsummarizethetriplet:rarity,extreme'impact',andretrospective(thoughnotprospective)
predictability.AsmallnumberofBlackSwansexplainsalmosteverythinginourworld,fromthe
successofideasandreligions,tothedynamicsofhistoricalevents,toelementsofourown
personallives.

Identifyingablackswanevent
Basedontheauthor'scriteria:

1.Theeventisasurprise(totheobserver).
2.Theeventhasamajoreffect.
3.Afterthefirstrecordedinstanceoftheevent,itisrationalizedbyhindsight,asifitcouldhavebeen
expectedthatis,therelevantdatawereavailablebutunaccountedforinriskmitigationprograms.The
sameistrueforthepersonalperceptionbyindividuals.

Copingwithblackswanevents
ThemainideainTaleb'sbookisnottopredictblackswanevents,buttobuildrobustnessagainstnegativeones
thatoccurandtobeabletoexploitpositiveones.Talebcontendsthatbanksandtradingfirmsarevery
vulnerabletohazardousblackswaneventsandareexposedtounpredictablelosses.Onthesubjectofbusiness
inparticular,Talebishighlycriticalofthewidespreaduseofthenormaldistributionmodelasthebasisfor
calculatingfinancialrisk,callingitaGreatIntellectualFraud.

InthesecondeditionofTheBlackSwan,Talebprovides"TenPrinciplesforaBlackSwanRobust
Society".[1]:37478[8]

Talebstatesthatablackswaneventdependsontheobserver.Forexample,whatmaybeablackswansurprise
foraturkeyisnotablackswansurprisetoitsbutcherhencetheobjectiveshouldbeto"avoidbeingthe
turkey"byidentifyingareasofvulnerabilityinorderto"turntheBlackSwanswhite".[9]

Epistemologicalapproach
Taleb'sblackswanisdifferentfromtheearlierphilosophicalversionsoftheproblem,specificallyin
epistemology,asitconcernsaphenomenonwithspecificempiricalandstatisticalpropertieswhichhecalls,
"thefourthquadrant".[10]

Taleb'sproblemisaboutepistemiclimitationsinsomepartsoftheareascoveredindecisionmaking.These
limitationsaretwofold:philosophical(mathematical)andempirical(humanknownepistemicbiases).The
philosophicalproblemisaboutthedecreaseinknowledgewhenitcomestorareeventsasthesearenotvisible
inpastsamplesandthereforerequireastrongapriori,oranextrapolatingtheoryaccordinglypredictionsof
eventsdependmoreandmoreontheorieswhentheirprobabilityissmall.Inthefourthquadrant,knowledgeis
uncertainandconsequencesarelarge,requiringmorerobustness.

AccordingtoTaleb,[11]thinkerswhocamebeforehimwhodealtwiththenotionoftheimprobable,suchas
Hume,Mill,andPopperfocusedontheproblemofinductioninlogic,specifically,thatofdrawinggeneral
conclusionsfromspecificobservations.ThecentralanduniqueattributeofTaleb'sblackswaneventisitshigh
profile.Hisclaimisthatalmostallconsequentialeventsinhistorycomefromtheunexpectedyethumans
laterconvincethemselvesthattheseeventsareexplainableinhindsight.

Oneproblem,labeledtheludicfallacybyTaleb,isthebeliefthattheunstructuredrandomnessfoundinlife
resemblesthestructuredrandomnessfoundingames.Thisstemsfromtheassumptionthattheunexpectedmay
bepredictedbyextrapolatingfromvariationsinstatisticsbasedonpastobservations,especiallywhenthese
statisticsarepresumedtorepresentsamplesfromanormaldistribution.Theseconcernsoftenarehighly
relevantinfinancialmarkets,wheremajorplayerssometimesassumenormaldistributionswhenusingvalueat
riskmodels,althoughmarketreturnstypicallyhavefattaildistributions.[12]

Talebsaid"Idon'tparticularlycareabouttheusual.Ifyouwanttogetanideaofafriend'stemperament,ethics,
andpersonalelegance,youneedtolookathimunderthetestsofseverecircumstances,notundertheregular
rosyglowofdailylife.Canyouassessthedangeracriminalposesbyexaminingonlywhathedoesonan
ordinaryday?Canweunderstandhealthwithoutconsideringwilddiseasesandepidemics?Indeedthenormalis
oftenirrelevant.Almosteverythinginsociallifeisproducedbyrarebutconsequentialshocksandjumpsall
thewhilealmosteverythingstudiedaboutsociallifefocusesonthe'normal,'particularlywith'bellcurve'
methodsofinferencethattellyouclosetonothing.Why?Becausethebellcurveignoreslargedeviations,
cannothandlethem,yetmakesusconfidentthatwehavetameduncertainty.ItsnicknameinthisbookisGIF,
GreatIntellectualFraud."

Moregenerally,decisiontheory,whichisbasedonafixeduniverseoramodelofpossibleoutcomes,ignores
andminimizestheeffectofeventsthatare"outsidethemodel".Forinstance,asimplemodelofdailystock
marketreturnsmayincludeextrememovessuchasBlackMonday(1987),butmightnotmodelthebreakdown
ofmarketsfollowingthe9/11attacks.Afixedmodelconsidersthe"knownunknowns",butignoresthe
"unknownunknowns",madefamousbyastatementofDonaldRumsfeld.[13]Theterm"unknownunknowns"
appearedina1982NewYorkerarticleontheaerospaceindustry,whichcitestheexampleofmetalfatigue,the
causeofcrashesinCometairlinersinthe1950s.[14]

Talebnotesthatotherdistributionsarenotusablewithprecision,butoftenaremoredescriptive,suchasthe
fractal,powerlaw,orscalabledistributionsandthatawarenessofthesemighthelptotemperexpectations.[15]

Beyondthis,heemphasizesthatmanyeventssimplyarewithoutprecedent,undercuttingthebasisofthistype
ofreasoningaltogether.

Talebalsoarguesfortheuseofcounterfactualreasoningwhenconsideringrisk.[7]:p.xvii[16]

Seealso
Badbeat Deusexmachina
Butterflyeffect Elephantintheroom
 Extremerisk Randomness
Hindsightbias Rareevents
Holygraildistribution Talebdistribution
Kurtosisrisk Thereareknownknowns
Listofcognitivebiases TheLongTail
Miracle Uncertainty
Normalaccidents Technologicalsingularity
Normalcybias Wildcard(foresight)
OutsideContextProblem Popper'ssolutiontotheblackswanproblemin
Globalcatastrophicrisks science
Quasiempiricisminmathematics

References
1.Taleb,NassimNicholas(2010)[2007].TheBlackSwan:theimpactofthehighlyimprobable(2nded.).London:
Penguin.ISBN9780141034591.Retrieved23May2012.
2.Taleb,NassimNicholas(2015),DoingStatisticsUnderFatTails:TheProgram,retrieved20January2016
3.Puhvel,Jaan(Summer1984)."TheOriginofEtruscantusna("Swan")".TheAmericanJournalofPhilology.Johns
HopkinsUniversityPress.105(2):209212.doi:10.2307/294875.JSTOR294875.JSTOR294875(https://www.jstor.
org/stable/294875)
4.Taleb,NassimNicholas."Opacity".Fooledbyrandomness.Retrieved20January2016.
5."BlackSwanUniquetoWesternAustralia",Parliament,AU:Curriculum,archivedfromtheoriginalon20090913.
6.Hammond,Peter(October2009),"Adaptingtotheentirelyunpredictable:blackswans,fattails,aberrantevents,and
hubristicmodels",WERIBulletin,UK:Warwick(1),retrieved20January2016
7.Taleb,NassimNicholas(22April2007)."TheBlackSwan:Chapter1:TheImpactoftheHighlyImprobable".The
NewYorkTimes.Retrieved20January2016.
8.Taleb,NassimNicholas(7April2009),TenPrinciplesforaBlackSwanRobustWorld(PDF),Fooledbyrandomness,
retrieved20January2016
9.Webb,Allen(December2008)."Takingimprobableeventsseriously:AninterviewwiththeauthorofTheBlack
Swan(CorporateFinance)"(InterviewPDF).McKinseyQuarterly.McKinsey.p.3.Retrieved23May2012."Taleb:In
fact,ItriedinTheBlackSwantoturnalotofblackswanswhite!ThatswhyIkeptgoingonandonagainstfinancial
theories,financialriskmanagers,andpeoplewhodoquantitativefinance."
10.Taleb,NassimNicholas(September2008),TheFourthQuadrant:AMapoftheLimitsofStatistics,ThirdCulture,
TheEdgeFoundation,retrieved23May2012
11.Taleb,NassimNicholas(April2007).TheBlackSwan:TheImpactoftheHighlyImprobable(1sted.).London:
Penguin.p.400.ISBN1846140455.Retrieved23May2012.
12.TrevirNath,"FatTailRisk:WhatItMeansandWhyYouShouldBeAwareOfIt"(http://www.nasdaq.com/article/fat
tailriskwhatitmeansandwhyyoushouldbeawareofitcm537614),NASDAQ,2015
13.DoDNewsBriefingSecretaryRumsfeldandGen.Myer,February12,200211:30AMEDT(http://www.defense.go
v/transcripts/transcript.aspx?transcriptid=2636)Archived(https://web.archive.org/web/20140903065011/http://www.d
efense.gov/transcripts/transcript.aspx?transcriptid=2636)3September2014attheWaybackMachine.
14.Newhouse,J.(14June1982),"Areporteratlarge:asportygame:ibettingthecompany",TheNewYorker,pp.48
105
15.Gelman,Andrew(April2007)."NassimTaleb's"TheBlackSwan" ".StatisticalModeling,CausalInference,and
SocialScience.ColumbiaUniversity.Retrieved23May2012.
16.Gangahar,Anuj(16April2008)."MarketRisk:Mispricedrisktestsmarketfaithinaprizedformula".TheFinancial
Times.NewYork.Archivedfromtheoriginalon20April2008.Retrieved23May2012.

Bibliography
Taleb,NassimNicholas(2010)[2007],TheBlackSwan:theimpactofthehighlyimprobable(2nded.),
London:Penguin,ISBN9780141034591,retrieved23May2012.
Taleb,NassimNicholas(September2008),"TheFourthQuadrant:AMapoftheLimitsofStatistics",
ThirdCulture,TheEdgeFoundation,retrieved23May2012.

Externallinks
 David,Dr.Gil,BlackSwansintheCyberDomain,IsraeldefenseNocontent.
McGee,Suzanne(5December2012),BlackSwanStocksCouldMakeYourPortfolioaTurkey,Fiscal
Times,CNBC,retrieved20January2016.

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