A black swan is a classical image of rarity. Image Credit: Sannse (CC by SA-3.0)
A black swan is an unexpected, unpredictable event with serious economic repercussions. The term was coined by finance professor and former trader Nassim Nicholas Taleb in a 2007 book and subsequently became popular during and after the 2008 financial crisis. In his book, Taleb lists World War I, the rise of the Internet and the September 11 terror attacks as examples of black swan events. Taleb insists that events such as these were truly unpredictable, despite rationalizations after the fact. The term is derived from the proverbial use of a “black swan” to mean a rarity or outlier.
Not all important economic events qualify as black swans; for instance, elections have somewhat predictable effects on the economy, whereas a natural disaster may occur more or less unexpectedly. Events can also qualify as black swans due to their duration. While an armed conflict between European superpowers may have been predictable during the lead-up to World War I, few could have predicted the extent of the conflict, and thus its full economic impact. While black swans are inherently difficult to prepare for, reliable strategies such as diversification and rebalancing can make a portfolio more robust when such events occur.
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