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Black Swan

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Submitted By tcsimmons
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What is a Black Swan? My first thought when it was mentioned in class during the semester was the film Black Swan that hit theatres in 2011. I, of course, was completely wrong. A Black Swan in the business world, or as Taleb explains, anywhere in the world is an event that comes as surprise effects things drastically and is often looked upon as something that should have been seen coming in hindsight. The Black Swan theory was popularized by Nassim Nicholas Taleb, and is defined as an event that breaks off from what usually happened in a certain scenario and that is nearly impossible to predict. The theory is most commonly used in the business sense to describe markets, however, Taleb uses it in a sense to describe every sort of event that can happen in the world. The Black Swan is typically characterized by three criteria. These are rarity, extreme impact, and retrospective predictability. These Black Swan events allow for Taleb to discredit many things that are used in the financial world today, such as Gaussian’s bell curve. The theory of the Black Swan has been proved very important topic and is used and talked about by many people in not only the business world but in everything. Taleb gives an example of what the Black Swan name comes from by describing the actual myth of the black swan. For as long as people had known there was no other type of swan besides a white one. Until Australia was discovered no one had ever seen a black swan and it used as a common expression of being illogical much like the phrase “when pigs fly” is used today. One sighting of a bird destroyed years of confirmation. There is no reason to rule out a “black swan” because you have never seen one. This applies to the theory as an event. There is no way you can rule out a certain event just because it has never happened, there is always a chance that it could happen.
Rarity
For an event to be characterized as a Black Swan, it must come as a surprise. These events are rare and can simply not be predicted. Taleb lists several events that are in his opinion, Black Swans. The one that stands out the most is the tragedy of the events that transpired on September 11, 2001. He urges us to consider, if the risk of this event happening on September 10 had been conceivable it would not have happened, but would something else with the same impact happened anyway? There is no way to know and that is the point. These events lay outside regular things that happen and have no history to even suggest that something like that could, would, or should happen. Listening to some video lectures of Taleb’s he gives several other examples of things. These include computers, growth of religions, and cultural phenomena’s. He explains them as pretty much anything that grows or is widely used randomly and that cannot be predicted based on previous event in history.
Extreme Impact The next criteria describing what a Black Swan is, is that the event has a major impact on people. Such as the twin towers being destroyed, natural disasters, or the stock market crashing and wiping out tons of money. These events effect large amounts of people everywhere not just in the locations that they occurred in at the time. These major impact events do not always have to be horrific disaster, however. Taleb uses other examples somewhat jokingly, but Harry Potter was one of these examples. Think about it, how many people read and watched those movies? Who could have predicted that it would have grown to be so popular? Based on history there was no evidence that said the series would have jumped to being one of the most popular and selling franchises of all-time, but it did. What and how do you describe that? As a Black Swan, something that is unpredictable, rare, but nevertheless has a major impact on the way society is viewed.
Hindsight Predictability
The last criteria that Taleb lists are that of retrospective predictability. This was the most difficult one for me to wrap my head around. It was defined under the criteria as; after the first recorded event it is explained in hindsight as if the event could have been expected. All in all saying after the fact, we believe that it is actually something that we could have foreseen happening. This is because, as humans, we think we have the ability to construct a sensible explanation using only the information that we want to use and removing the information that we do not want to use. This practice can only be done with the benefit of hindsight and makes no sense in correlation because these are not events that will ever be predicted.
Turkey
Keeping with his bird theme, Taleb uses the turkeys raised for Christmas dinner as an example. These turkeys are bred for us, humans, to eat. Assume that turkeys think on our level for a second and keep an open mind. The turkeys are born and are fed every single day by humans from the beginning of their life. It becomes normal they get fed everyday and form a “relationship” with us. Everyday just strengthens the turkey’s mindset (hypothetically) that they are friends with the humans and that everyday for their life they will get fed. Then one day, BOOM, they are taken off and slaughtered. This event in the life of a turkey is a Black Swan. However, for a butcher this is just a regular day in the life. From that point of view, and if you think about it in the right mind set, Black Swan are just a sick joke meant for suckers. If you can keep and open mind and realize that anything can happen then there will never be a Black Swan that happens. The moral of this that Taleb wants to get across is to not be a turkey. DO not trust that certain things will not happen just because they have not in history. There is always a chance that something will happen. No matter how minuscule that chance is it could still happen and that is where a Black Swan will come into place. Do not be a turkey.
Gaussian Bell Curve

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