Black swan theory is an idea proposed by Nassim Nicolas Taleb that refers to unlikely, unpredictable events that have massive impact and are often incorrectly rationalized in hindsight.
Black Swan events have the following three attributes:
- Outlier — an event that is extremely rare and lies outside the realm of regular expectations
- Impact — an event that carries extreme impact that can be transformative for economies, societies, or individuals.
- Retrospective predictability — After the event, people will rationalize it as something that was predictable, even though it wasn’t predicted in advanced. The event seems obvious in hindsight.
What are some Black Swan events?
- World War I
- The rise of the Internet
- The personal computer
- Large language model performance
Why identify Black Swans? It’s not about predicting unpredictable events (usually through hindsight bias), but to minimize the effects of these negative events while still capture the outputs of the positive events. One way that Taleb does this is through a concept called antifragility, but at the end of the day, it’s just good risk management.