What is 'black swan' theory?

Posted on by Kieran McGovern

Nassim Taleb's The Black Swan (2007)puts forward the theory that the most important events are usually impossible to predict. The title refers to the fact that all swans were believed to be white - until a black one was discovered.

This unpredictability is particularly important in relation to finance. A trader can calculate what he thinks is likely to happen in the market, taking into account known contingencies. What can't be predicted is what Donald Rumsfeld called - 'the unknown unknowns',
There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know.

But there are also unknown unknowns. There are things we don't know we don't know.
Former US Defense Secretary Donald Rumsfeld on February 12, 2002
Taleb puts it like this
The events that impact on our lives most are impossible to predict. After they occur we find rationalisations for them but we should accept that random events may disrupt any model or plan.

More on this here

The Black Swan: Second Edition: The Impact of the Highly Improbable:
Known and Unknown: A Memoir 

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