In economics and the stock market, a „black swan“ is a rare, unexpected and unforeseen event that has a major impact and powerful influence on the current situation. A black swan ends the normality that has prevailed until now. It can cause stock market collapses and throw markets off their course.
What is a black swan? What does the metaphor mean? Meaning, definition
The „black swan“ as a metaphor ultimately stands for two things: there is always a residual risk and you can never prepare for everything. Because you can’t prepare for a black swan, it surprises us and hits us unexpectedly. It just happens and nobody suspected it! (This German saying also fits well here: „It always comes differently than one thinks.“) As a conclusion from this it is true that one should never be too sure of oneself, that one should question certainties and that one should never see things too one-sidedly. It is true that the world remains unpredictable and that the black swan reminded us humans of this.
Even if one cannot prepare for a black swan, one can learn from it. Because the black swan reveals weaknesses and shortcomings. It shows that certain risks have been underestimated up to now, if they have been taken into account.
In nature, swans always appear as a pair. This does not apply to „black swans.“ They are singular events.
The metaphor „black swan“ is now used not only in business, financial markets and the stock market, but also in politics and science.
Examples of a black swan are: Lehman Brothers bankruptcy in 2008, nuclear disaster in Fukushima in 2011, nuclear phase-out in Germany in 2011, Corona virus (Covid-19) in 2019/2020.
Winning the lottery is a black swan. Possible, but very unlikely!
Partly it is also spoken of the „black swan effect“ or „black swan event“.
Where does the expression „black swan“ come from? Meaning, word origin
The term „black swan“ was coined by publicist and stock market trader Nassim Nicolas Taleb in his book „The Black Swan: The Power of Highly Improbable Events.“ In this book, he refers to events that are highly improbable and have violent consequences as a „black swan.“ (Nassim Nicolas Taleb published the book in 2007.)
Nassim Nicolas Taleb has used the metaphor „black swan“ for events with both positive and negative outcomes.
Nassim Nicolas Taleb writes about how people settle into a „zone of predictability“ and find their comfort zone there. This leads them to stop looking at extremely unlikely events and believe with false certainty that they have „everything“ under control. According to Taleb, even experts do not foresee „black swans.“ Also, „black swans“ are hardly derivable from experience or history.
Further, Taleb comments that people know much less than they believe. Even if they think they learn from the past and make better predictions, they distort their memories and partly rewrite the past. (Keyword: backward looking error) Taleb expresses himself that it is an illusion to believe that we humans completely understand and correctly classify presently occurring events.
Discovery of the black swans
The metaphor and idea of the black swan goes back to the Roman poet Juvenal. He lived in the 1st and 2nd century. He knew only white swans. In one of his texts he expressed that a faithful wife is like a rare bird that exists only in foreign lands. A rare bird comparable to a black swan. (Note: What he was actually saying was that there are no faithful wives or that it is impossible for wives – in his opinion – to be faithful).
Even in the Middle Ages, the belief that there were only white swans persisted. Black swans were even said to have an ominous effect, so that no one ever wanted to see one or could imagine that black swans existed. (The color black was and is associated with sickness, suffering and death).
Black swans were considered unclean, dirty and polluted because of their color. White swans on the other hand, because of their white color, were a symbol of purity and power. This led to the fact that many noblemen used the swan as a heraldic animal and also named places after him. Only two famous castles are mentioned here: Neuschwanstein and Hohenschwangau.
Until the 17th century, black swans were unknown in Europe. People knew only white swans. (It was unthinkable to them that swans could also be black.) It was not until the European and Dutch navigator, Willem de Vlamingh, saw real black swans in Australia in 1697. Reports of these sightings spread among sailors. In English, the metaphor of the black swan, an unlikely but not impossible event, emerged.
In Europe, the black swan caused a stir and was a zoological sensation. For the previously believed truth that all swans were white proved to be false.
Karl Popper and black swans
Karl Popper (1902-1994) also used the „black swan“ metaphor in his work on the limits of empirical research. The metaphor served him to illustrate that observations can never verify hypotheses, but they can falsify them.
Example: Someone observes swans and wants to determine what color they are. The swan observer now sees 50 swans and all of them are white. He concludes that the plumage of all swans is white. This observation encounters a problem, because the swan observer can never look at all swans (in this world). Thus, it remains open whether there is possibly a swan that is not white. Thus the statement „All swans are white“ can never be verified.
However, the opposite is possible. The statement „All swans are white“ can be disproved. For this only one (1!) swan must be found, which is not white.
As a consequence, the swan observer can qualify his statement: „Not all swans are white“.
Further meaning of black swan
There is one species of swan that is actually black. This species is called a mourning swan or black swan. Its scientific name is „Cygnus atratus“.
A synonym for „black swan“ is „white raven.“
„Black Swan“ is a movie released in 2010 by director Darren Aronofsky starring Natalie Portman.