The term “black swan” was popularized by Nassim Nicholas Taleb in his 2007 book The Black Swan: The Impact of the Highly Improbable. A black swan event is characterized by three main attributes:
- It is rare, and it lies outside our regular expectations.
- It has an extreme impact when it occurs.
- Despite (1) and (2), human nature makes us concoct explanations for its occurrence after the fact, making it appear less random and more predictable than it actually is.
Black swan events play a much larger role in shaping history, science, finance, and technology than we might typically acknowledge. Examples include the 9/11 attacks, the 2008 financial crisis, and the COVID-19 pandemic.
There is an inherent unpredictability of complex systems considering the limitations of human knowledge. Traditional statistical methods that assume normal distributions might be inadequate, as they could fail to account for extreme outliers.
Instead of trying to predict black swan events, Taleb advocates for building robustness against negative ones while being open to exploiting positive ones. Some strategies include:
- Diversifying risk across multiple uncorrelated entities
- Maintaining backup systems and resources for redundancy
- Avoiding overreliance on forecasts and predictive models
- Building optionality into decisions and strategies
By embracing uncertainty and preparing for the unexpected, we can navigate an inherently unpredictable world more effectively.