1 Jul 2010

Black Swan Event

How did Black Swan name came into picture?

For a long time, people used to think all swans are white only. It was only when black swans were found in Australia, a long-time notion was changed!

Taleb tries to explain how Black Swan events happen in real life and what are the impacts of it.


Identifying a black swan event

Based on the author's criteria:

1. The event is a surprise (to the observer).
2. The event has a major impact.
3. After the fact, the event is rationalized by hindsight, as if it had been expected.

Taleb suggests that since most Black Swan events are without any precedence, it is almost impossible to predict such events.

So, one can only accept the events after they have happened.
The main idea in Taleb's book is not to attempt to predict Black Swan Events, but to build robustness against negative ones that occur and being able to exploit positive ones. Taleb contends that banks and trading firms are very vulnerable to hazardous Black Swan Events and are exposed to
losses beyond that predicted by their defective models.

See Wikipedia for more.

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