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A black swan is used to describe an unpredictable or unexpected event that is almost impossible to predict and has potentially extreme consequences. Extreme rarity, significant impact, and widespread claims evident in hindsight characterize black swan events.
Black swan events can lead to catastrophic damage to an economy by negatively affecting markets and investments. Even the use of potent modeling cannot stop a black swan event. Dependence on standard forecasting tools can fail to forecast and probably increase vulnerability to black swans by transmitting risk and offering incorrect security.
The term was popularized by Nassim Nicholas Taleb, an author, and a former Wall Street trader.
The three defining attributes of a black swan event, as defined by Taleb, include:
It is to be noted that before the 2008 financial crisis, Taleb wrote about the concept of a Black Swan Event in a 2007 book. Taleb argued that because black swan events are impossible to predict due to their extreme rarity, it is essential for people should always assume the possibility of a black swan event, be it whatever, and to try to plan accordingly. When a black swan event occurs, portfolio diversification can offer investors protection against losses.
Avoidance of portfolio concentration and Hedges (e.g. Options) are also thought to be effective measures to minimize losses when such an event occurs.
Examples of Black Swan Event:
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