Why the name Black Swan?

Early Europeans once thought that all swans were white.

In fact, a common saying if you believed someone was telling you an untruth was "I'll believe that when I see a feather from a black swan!"  Then in 1697 Dutch explorers discovered Black Swans in Western Australia. This discovery proved sometimes things are not always as we believe them to be. So the Black Swan became a symbol of a moment in time that challenges common beliefs and turns prior thinking upside-down.   

How certain are you about your retirement beliefs?  If you were to "Test Drive" your future retirement what new information might you uncover?   If you had a future financial concern in your retirement plan, when would you and your spouse want to know about it?    Sooner of later?


Current day definition of a 'Black Swan' event: 

An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict. This term was popularized by Nassim Nicholas Taleb, a finance professor and former Wall Street trader. His book, a New York Times Best Seller is "The Black Swan" - The Impact of the HIGHLY IMPROBABLE.

A current example of this reference is the newspaper article below using "black swan" to describe what happened to 19 Arizona firefighters in July, 2013.

Investopedia explains 'Black Swan'
Black swan events are typically random and unexpected. For example, the previously successful hedge fund Long Term Capital Management (LTCM) was driven into the ground as a result of the ripple effect caused by the Russian government's debt default. The Russian government's default represents a black swan event because none of LTCM's computer models could have predicted this event and its subsequent effects.

http://en.wikipedia.org/wiki/Black_swan_theory

The black swan theory or theory of black swan events is a metaphor that describes an event that is a surprise (to the observer), has a major impact, and after the fact is often inappropriately rationalized with the benefit of hindsight.  The event can either be positive or negative relative to your position. 

The theory was developed by Nassim Nicholas Taleb to explain:
The disproportionate role of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology.  The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)

The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role

of the rare event in historical affairs.

Unlike the earlier philosophical "black swan problem", the "black swan theory" refers only to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences.

Specifically, Taleb asserts in the New York Times: What we call here a Black Swan (and capitalize it) is an event with the following three attributes.

First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.

Second, it carries an extreme impact.

Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explains almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives.

Background

Black swan events were introduced by Nassim Nicholas Taleb in his 2004 book Fooled By Randomness, which concerned financial events. His 2007 book (revised and completed in 2010), The Black Swan extended the metaphor to events outside of financial markets. Taleb regards almost all major scientific discoveries, historical events, and artistic accomplishments as "black swans"—undirected and unpredicted. He gives the rise of the Internet, the personal computer, World War I, and the September 11 attacks as examples of black swan events.

The phrase "black swan" derives from a Latin expression; its oldest known occurrence is the poet Juvenal's characterization of something being "rara avis in terris nigroque simillima cygno" ("a rare bird in the lands, very much like a black swan").When the phrase was coined, the black swan was presumed not to exist. The importance of the simile lies in its analogy to the fragility of any system of thought. A set of conclusions is potentially undone once any of its fundamental postulates is disproved. In this case, the observation of a single black swan would be the undoing of the phrase's underlying logic, as well as any reasoning that followed from that underlying logic.

Juvenal's phrase was a common expression in 16th century London as a statement of impossibility. The London expression derives from the Old World presumption that all swans must be white because all historical records of swans reported that they had white feathers. In that context, a black swan was impossible or at least nonexistent. After Dutch explorer Willem de Vlamingh discovered black swans in Western Australia in 1697, the term metamorphosed to connote that a perceived impossibility might later be disproven. Taleb notes that in the 19th century John Stuart Mill used the black swan logical fallacy as a new term to identify falsification.

After the first recorded instance of the event, it is rationalized by hindsight, as if it could have been expected; that is, the relevant data was available but unaccounted for in risk mitigation programs. The same is true for the personal perception by individuals.


An example Taleb uses to explain his theory is the events of 11 September 2001. 9/11 was a shock to all common observers. Its ramifications continue to be felt in many ways: increased levels of security; "preventive" strikes or wars by Western governments. The coordinated, successful attack on the World Trade Center and The Pentagon using commercial airliners was virtually unthinkable at the time. However, with the benefit of hindsight, it has come to be seen as a predictable incident in the context of the changes in terrorist tactics.

Coping with black swan events

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 be 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 those predicted by their defective models. On the subject of business in particular, Taleb is highly critical of the widespread use of the normal distribution model as the basis for calculating financial or other risk. In the second edition of The Black Swan, Taleb provides "Ten Principles for a Black-Swan-Robust Society".

Taleb states that a black swan event depends on the observer. For example, what may be a black swan surprise for a turkey is not a black swan surprise to its butcher; hence the objective should be to "avoid being the turkey" by identifying areas of vulnerability in order to "turn the Black Swans white".