Black Swan Event (Investing)

Definition

The term black swan event refers to an incident of immense impact, which was not anticipated, and has a random probability of occurring.  Only recognized in hindsight, individuals assume the risk of a black swan event when they invest in financial markets.

Explanation

A black swan is a metaphor for something that is completely unexpected, since swans are normally white.  The term is derived from the book The Black Swan, the Impact of the Highly Improbable, which was written by Nassim Nicholas Taleb.  According to the author, a black swan event must possess the following characteristics:

  • It is a surprise to the observer.
  • The event has an immense, almost disruptive, impact.
  • It is typically rationalized only in hindsight that the event could have been expected.  That is to say, the data supporting the event was not hidden, but it was never taken into consideration in terms of risk.

The term grey swan was derived from this same concept, and is used to describe an incident of sizable impact, which can be anticipated, but has a relatively low probability of occurring.

Related Terms

market crash, dot-com bubble, catalyst, economic bubble, gray swan event