Before the discovery of Australia, people in the Old World were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empirical evidence. The sighting of the first black swan might have been an interesting surprise for a few ornithologists (and others extremely concerned with the coloring of birds), but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single (and, I am told, quite ugly) black bird. — Nassim Taleb, The Black Swan: The Impact of the Highly Improbable
The earthquake, tsunami and current nuclear crisis in Japan, as well as the current geopolitical unrest in the Middle East challenge the concept of market stability. Black Swan events have tested the limits of the financial markets and banking systems for decades (some might recall the “Tulip Mania” bubble in the early 1600’s). Reflect on the following list, via Doug Kass of those once in a lifetime events that have occured over the past decade:
- the Sept. 11, 2001, attacks on the World Trade Center and Pentagon;
- a 75% decline in the Nasdaq;