A Black Swan is a term, recently made famous by Nassim N. Taleb, to describe an unforeseen event of extreme severity that, due to human nature, we regard as extremely improbable - i.e. when pigs manage to fly the stock market will experience a fall of 22.% in a single day.
The Black Swan is Taleb's parable for the problem of induction:
"No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion".
Black Monday should remind us to not be complacent about risk. I have decided to put 70% of my savings into stocks in order to chase high returns. And everything seems fine as I have never lived through a drastic market correction. However, just because I have never seen stocks fall by 20% or more, this does not mean I should rule out this scenario. Chances are, there's probably a 20% drop out there with my name on it.
Taleb also uses the story of a turkey just before Thanksgiving to illustrate the Black Swan. Throughout his whole life, the turkey has come to regard humans as wonderful benign creatures that show up several times a day to provide food. All his experience points him in this direction. That is until Thanksgiving, when something very unexpected will change the turkey’s mind.
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