Black swan - Financial definition
Concise definition of the term black swan
Expression designating an unexpected event that has a major impact, sometimes even historical significance, and which is rationalized by hindsight as if it could have been expected.
Comprehensive definition of the term black swan
Contemporary use of the expression black swan in reference to an unexpected but highly impacting event is attributed to former trader Nassim Nicholas Taleb, who first introduced it in his 2001 book Fooled by Randomness – The Hidden Role of Chance in Life and in the Markets. In this book, a collection of essays on the impact of randomness on financial markets.
It further gained in popularity with the publication of his next book The Black Swan: The Impact of the Highly Improbable in 2010, where Taleb offers insights on the factors that contribute to poor decision making and sometimes to black swans – events thought to be impossible that redefine our understanding of the world.
As mentioned above, black-swan events are characterized by the following three attributes:
- Black swans are outliers. They are come as a surprise, falling outside the realm of usual expectation
- They have a major impact, sometimes even of historical significance
- With the benefit of hindsight, they are often rationalized as something that could have been foreseen, had all the available facts and data been examined carefully enough.
The analogy dates back to the 17th century when Dutch explorer Willem de Vlamingh discovered black swans in Australia which, at the time, went against the belief held by Europeans that all swans were white. By extension, a black swan is used to describe any event or phenomenon which occurs although it is not considered a possibility.
The term is used as a countable noun or as a modifying adjective, like for example in the expression black-swan event.