Nassim Nicholas Taleb is an expert on risk and randomness. In the lecture below, he discusses “The Black Swan: The Impact of the Highly Improbable“. a book published in 2007 that focuses on the extreme impact of certain kinds of rare and unpredictable events and human tendency to find simplistic explanations for these events retrospectively. This theory has since become known as the black swan theory.
Nassim Nicholas Taleb defines a “black swan” as a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was. The success of Google was a black swan; so was 9/11. Black swans underlie almost everything about our world, from the rise of religions to events in our own personal lives.
The main idea in Taleb’s book is not to attempt to predict Black Swan events, but to build robustness to negative ones that occur and being able to exploit positive ones. Taleb contends that banks and trading firms are very vulnerable to hazardous Black Swan events and are exposed to losses beyond those that are predicted by their defective financial models. The book’s position is that a Black Swan event depends on the observer.