Black swan theory

According to the black swan theory, a black swan is an event that is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight.

The theory was developed by Nassim Nicholas Taleb 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 the 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

Unlike the earlier philosophical "black swan problem", the "black swan theory" refers only to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences.

The theory was introduced in Taleb's 2007 book, The Black Swan. He gives the rise of the Internet, the personal computer, World War I, and the September 11 attacks as examples of Black Swan Events.

Links

• The Fourth Quadrant and The Limits of Statistics by Nassim Nicholas Taleb, September 2008, about the limits of statistics
• "Fools Put Faith in Data Alone" by James Sheehan, February 2006
• How Mr. Taleb Got Utterly Fooled by Randomness by Gary North, March 2007
• Black swan theory at Wikipedia