Definition
The term black swan event refers to an incident of immense impact, which was not anticipated, and has a random probability of occurring. Only recognized in hindsight, individuals assume the risk of a black swan event when they invest in financial markets.
Explanation
A black swan is a metaphor for something that is completely unexpected, since swans are normally white. The term is derived from the book The Black Swan, the Impact of the Highly Improbable, which was written by Nassim Nicholas Taleb. According to the author, a black swan event must possess the following characteristics:
It is a surprise to the observer.
The event has an immense, almost disruptive, impact.
It is typically rationalized only in hindsight that the event could have been expected. That is to say, the data supporting the event was not hidden, but it was never taken into consideration in terms of risk.
The term grey swan was derived from this same concept, and is used to describe an incident of sizable impact, which can be anticipated, but has a relatively low probability of occurring.
Related Terms
The term market crash is used to describe a sudden decline in stock prices across a significant number of business sectors, resulting in a dramatic loss of investor wealth. Market crashes are oftentimes preceded by a stock market bubble.
Moneyzine EditorJanuary 24th, 2024
The term dot-com bubble refers to the rapid increase in the value of companies conducting business in the technology sector. The dot-com bubble expanded from the years 1995 through 2000, with the Nasdaq Index rising from around 1,000 to just over 5,100.Moneyzine EditorJanuary 16th, 2024
The term catalyst refers to a disclosure that significantly impacts the value of a security. Catalysts can positively or negatively affect a security's value.Moneyzine EditorJanuary 11th, 2024
The term economic bubble refers to a condition where the price of an asset moves into a range that significantly deviates from its fundamental value. Economic bubbles typically occur because of overly optimistic, or unrealistic, investor sentiment.Moneyzine EditorJanuary 16th, 2024
The term gray swan event refers to an incident of sizable impact, which can be anticipated, but has a relatively low probability of occurring. Often recognized in hindsight, individuals assume the risk of a gray swan event when they invest in financial markets.Moneyzine EditorJanuary 19th, 2024
