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Black swan

A black swan event is related to the butterfly effect.

The latter was coined by the American mathematician and meteorologist Edward Lorenz in 1973 as a way to illustrate the chaotic nature of weather and the huge difficulties of modelling it on computers. A tiny change in the initial conditions can often lead to dramatically different outcomes. His example was of a butterfly that fluttered its wings in Brazil, setting off a tornado in Texas.

The phrase black swan gained some popularity in 2008 because of the book The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb, a former market trader. The phrase was not new: Taleb had introduced it in his work of 2001, Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life and a few appearances are known before 2008, such as in Maggie Mahar’s book of 2003, Bull!: A History of the Boom, 1982–1999.

Taleb argued that the stock market is as unpredictable as any chaotic system and that people who thought they could forecast it on the basis of past trends were fooling themselves. This was considered a contrarian view in 2007, but recent events have convinced many doubters of its truth. For Taleb, a black swan is an unpredicted and unpredictable event that resembles the finding of black swans in Australia by the seventeenth-century Dutch explorer Willem de Vlamingh. It was taken for granted by Europeans at the time that all swans were white, so his finding could not have been expected and was outside previous experience.

This idea of a black swan confounding expectations builds on earlier uses of a similar idea. It was used by Karl Popper to illustrate his argument that it was impossible to prove a scientific theory, only falsify it. He gave the assertion that “all swans are white” as a theory that can never be absolutely proved, as we would need to check every swan in existence to establish its truth; on the other hand, you only need to see one black swan to disprove it.

The term black swan has been taken up in financial circles and now appears more widely. Though it mainly refers to the recent global financial turmoil, it is also used for unexpected happenings — the closure of the London Stock Exchange for most of 10 September 2008 due to a computer failure was called a black-swan event at the time.

Either the financial world as we know it is coming to an end — or it’s not! We’ll only know in hindsight. But unless this is the proverbial “black swan” — the unimaginable and unique event that annihilates capitalism — this panic will subside.

Chicago Sun-Times, 10 Oct. 2008

The credit crunch and banking crisis definitely qualifies as a black swan. No one saw it coming and no one knows how it is going to end. All we know is that it is messy.

The Press, New Zealand, 8 Oct. 2008

Page created 22 Nov. 2008

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Last modified: 22 November 2008.