Glossary term
Black Swan Event
Subject: Risk Management, Strategic and Systemic Risk
Also known as: Black swan
A black swan event is a rare, hard-to-predict event with extreme impact, which people explain after it happens as though it had been predictable all along.
Explanation
Nassim Nicholas Taleb popularised the term in 2007. It has three features: the event lies outside normal expectation because nothing in past data points to it; its consequences are severe; and afterwards people build explanations that make it look foreseeable. The idea warns against trusting models fitted to history, which tend to understate extremes. Events sometimes cited include the 2008 financial crisis and the Covid-19 pandemic, though people dispute whether those were truly unforeseeable. Firms cannot list the unknown, so they concentrate on resilience: limits on concentrations, spare capital and liquidity, simple structures, backup capacity and rehearsed crisis plans, along with stress tests that go beyond history. A black swan differs from tail risk, which can be modelled, and from a known risk with a low probability. Resilience measures such as spare liquidity are justified by what a model cannot foresee, not by its forecasts.
Example
An airline's risk model covers fuel prices, strikes and bad weather. Then a sudden travel ban removes most flights within weeks, a case no scenario had tested. Carriers with large cash reserves, flexible aircraft leases and a rehearsed crisis plan ride out the worst weeks more easily than those with refined forecasts but thin cash.
Not to be confused with
- Tail Risk
- Tail risk is an extreme outcome that models can describe, even if rare; a black swan lies outside what anyone had imagined.