Black swan event

The term was popularised by Nassim Nicholas Taleb and has three parts, all of which are required. The event lies outside the range of what previous observation suggested was possible. Its impact is extreme. And after the fact it is explained as though it had been foreseeable all along. The third part is what makes the idea uncomfortable, because the explanations that follow such an event are usually persuasive, and being persuaded by them encourages the belief that the next one will be spotted in advance.

For a market participant the consequence is mechanical rather than philosophical. Risk models built from historical volatility assume a distribution of outcomes, and a move far outside that distribution does not merely produce a large loss, it removes the conditions the model relied on. Depth thins or disappears, quoted prices gap instead of moving through the intervening levels, and instructions that assumed a price would be available at a level, stop orders among them, are filled at the first price the market offers or not at all.

The label is applied loosely and that is the main thing to watch for. Events that were widely discussed beforehand, a scheduled referendum or a currency peg under visible strain, are routinely called black swans afterwards, which inverts the definition. Taleb's own emphasis falls on what cannot be forecast rather than on naming events, and the response he argues for concerns the size of an exposure rather than the accuracy of a prediction. Where practitioners genuinely disagree is whether such events are unforeseeable or merely unpopular to state out loud in advance.