black swan: the occurrence (or non-occurrence) of an event that: lies outside of the range of normal expectations; has an extreme impact; and only seems explainable and predictable in hindsight. #blackswan @nntaleb @journofletcher @jonsindreu
A term coined by NYU professor, Nassim Nicholas Taleb. The reference is to the discovery of the first black swan after the consensus was that all swans were white.
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“Black Swan” is a term coined by New York University professor of risk engineering, Nassim Nicholas Taleb, and discussed at length in his book: “The Black Swan: The Impact of the Highly Improbable,” 2nd edition (Random House Trade Paperback 2007, 2010) ISBN 978-0-8129-7381-5[In his Prologue to “The Black Swan,” Taleb introduces the concept:]
“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 . . . 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 . . . .
What we call here a Black Swan (and capitalize it) is an event with the following three attributes.
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact (unlike the bird). Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.
I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives.”[In a footnote, Taleb makes it clear that he is focused not on the] “possibility of the exception (black swan)” [but rather on the] “role of the exceptional event (Black Swan) leading to the degradation of predictability and the need to be robust to negative Black Swans and exposed to positive ones.” [In his next footnote, he emphasizes that:] “The highly expected not happening is also a Black Swan.” [Italics in original; bold highlighting is added. Quoted from pp. xxi-xxii of Prologue to Taleb, Nassim Nicholas, “The Black Swan: The Impact of the Highly Improbable,” 2nd edition (Random House Trade Paperback 2007, 2010) ISBN 978-0-8129-7381-5]
See book at Amazon: “The Black Swan”
See more about author at: Nassim Nicholas Taleb
Having left their posts as GoDaddy vice presidents, where they helped small businesses and restaurants establish web presences, Rene Reinsberg and Marek Olszewski are teaming up on a new blockchain project called Celo, which translates to “purpose” in the contrived, international language Esperanto. The tech is a so-called fork of Ethereum, and will serve as the basis for a social payments platform built for mobile phones.
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The Celo white paper notes that the proposition is “not risk-free” and that a “black swan event” could derail it, while also laying out countermeasures designed to protect against just such a scenario. “Our simulations across a range of market assumptions will be presented in a forthcoming paper,” the authors write.
See article at: Robert Hackett, “x-GoDaddy Execs Raise $6.5 Million for Cheap, Android Phone-Friendly Blockchain,” Fortune, June 22, 2018
For funds that thrive on crisis, the volatility jolt that wiped out over $4 trillion of global stock value in February was merely a tremor. A full-blown financial earthquake looms.
They’re known as tail funds, for whom the traditional objective of producing annual returns is replaced by the contrarian task of preparing for events that are more than three standard deviations from the norm, or those that have a 0.3 percent chance of coming to pass.
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February’s equity selloff doesn’t register as a tail risk, or black swan, event outside of the relatively small group of investors who wager on securities tied to the VIX. But it may presage a new regime of choppy trading across asset classes, increasing the prospect of hard-to-predict events, according to strategists.
See article at: Yakob Peterseil and Cecile Gutscher, “Winning ‘Black Swan’ Investor in 2008 Says Market’s More Fragile,’ ” Bloomberg, April 17, 2018
One group of hedge funds has long pitched the idea they can protect investors and even prosper when markets fall sharply. But when volatility returned, the big idea didn’t work.
The reason: The funds kept betting on sharp falls, but failed to profit from sharp rebounds–a disappointment after years of losing money in the bull market, according to portfolio managers.
The woes of these “tail-risk” funds, designed to benefit from market turmoil, show that in a month when many investors lost massive sums betting against volatility, wagers on it proved tricky too.
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Tail-risk funds typically purchase options that pay out if market falls, but otherwise expire worthless. Versions of these strategies that bet on extreme and seemingly unlikely catastrophes are dubbed “black swan” funds.
See article at: Laurence Fletcher and Jon Sindreu, “Bet Against Volatility? You Lost. Bet On It? You Lost Too!,” The Wall Street Journal, April 4, 2018
In the wake of the global financial crisis, fear of such “black-swan” events drove some investors into hedge funds that offered protection should markets plunge. But the swans have yet to return, and such strategies have fallen out of favor.
The patience of many investors has run out after losing money during the intervening years of mainly benign market conditions. According to data by CBOE Eurekahedge, those who invested in these tail-risk funds—which are designed to reap benefits from sudden slumps—when their performance peaked in September 2011 would have by now lost 55% of their money.
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The term black swan was popularized by writer and academic Nassim Nicholas Taleb to describe extreme events that are difficult to predict and more likely to happen than forecast.
Historically high stock valuations, increased consumer leverage and extraordinary central-bank stimulus are among the factors that some money managers believe make a black-swan event more likely than at any time since the financial crisis, which sent stock, credit and commodity markets plummeting.
However, critics point to evidence suggesting that buying insurance is always a losing strategy in financial markets.
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There is no set definition for how far markets must fall before the drop can be labeled as a black-swan event.
See article at: Jon Sindreu and Laurence Fletcher, “A Decade After Crisis, Investors Have Stopped Hunting for Black Swans,” The Wall Street Journal, September 5, 2017
Former General Electric Co. chief executive Jeffrey Immelt oversaw an iconic company over 16 years and has a lot to say about it, some of which is scary. “I led a team of 300,000 people for 6,000 days… through recessions, bubbles, and geopolitical risks,” he writes in Harvard Business Review. The article, which amounts to a mini-memoir, is full of detail about the wrenching change he and GE endured. “I saw at least three ‘black swan’ events. New competitors emerged, business models changed, and we ushered in an entirely new way to invest. But we didn’t just persevere; we transformed the company.”
See article at: Kim S. Nash, “What Your CEO is Reading: No Wusses in the Corner Office; The ‘Clean Meat’ Future; Letters from Space,” The Wall Street Journal, August 25, 2017
You’ve heard of black swans—events that are unthinkably rare, immensely important, and as unpredictable in advance as they are inevitable in hindsight. . . .
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As Nassim Nicholas Taleb’s bestseller “The Black Swan” made clear, the human mind is poorly equipped to prepare us for rare, important and unpredictable events.
See column at: Jason Zweig, “The Intelligent Investor: Forget About Black Swans, the One Floating Ahead is Neon,” The Wall Street Journal, July 23, 2011
So-called black swan funds — named for rare and unexpected events — offer a way to profit in the event of a market collapse.
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Although the names tail risk funds and black swan funds are often used interchangeably, they are distinct. Tail risk events are situations that, while conceivable, are highly unlikely based on mathematical modeling. By contrast, a black swan — a concept popularized by Nassim N. Taleb’s 2007 book “The Black Swan” — is an event that models fail to predict.
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As the stock markets fell [in response to a major crisis, like the collapse of the Chinese economy], a tail risk or black swan fund would profit because it owned the options to sell shares in the Standard & Poor’s 500-stock index at far higher levels. The more the index dropped, the more valuable those options would become.
See article at: Azam Ahmed, “New Investment Strategy: Preparing for End Times,” The New York Times, June 30, 2011
[S]ome people view the recent economic crisis as just another “black swan event,” one of those outliers, as popularized by Nassim Taleb, that come out of the blue. And it’s clear that a lot of smart people simply didn’t see the housing bubble, the instability of our financial sector or the shock that came in 2007 and 2008.
But the theory of outlier events doesn’t actually say that they cannot eventually be predicted. Many of them can be, if the right questions are asked and we use new and better data. Hurricanes, for example, were once black-swan events. Now we can forecast their likely formation and path pretty well, enough to significantly reduce the loss of life.
See article at: Robert J. Schiller, “Needed: A Clearer Crystal Ball,” The New York Times, May 1, 2011
The details of this catastrophe [the damage inflicted by the March 2011 Japanese earthquake] were unforeseeable, leading some to conclude this was a black swan event — something so wildly unexpected, so enormous in its impact, that it seems to defy our understanding and expose the fragility of our knowledge of the world. How could anyone have predicted this?
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Many have compared the events unfolding in Japan with 9/11, Hurricane Katrina, the financial collapse of 2008 and 2009, the BP oil spill, and the uprisings in the Arab world — in that all have shown the limits of the collective wisdom of the marketplace. For a moment, all the swans seemed black. And those swans seemed blacker still when viewed through the lens of today’s hyperkinetic global markets.
“There are an amazing number of crosscurrents in the world economy right now, more than I’ve seen in 25 years,” said Shawn Reynolds, a co-portfolio manager at Van Eck Associates in New York.
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Nassim Taleb, the author and market theorist who popularized the phrase “black swan” in his 2007 best seller, argues that we have psychological biases that blind us to the enormous role played by rare events — like a 9.0-magnitude earthquake. And yet we rely on history for guidance.
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In the face of black swans — also known as fat-tail events, for the way their occurrences are distributed along a probability curve — market pricing may be impossible.
See article at: Jeff Sommer, “A Crisis That Markets Can’t Grasp,” The New York Times, March 20, 2011
“TAIL-RISK” hedging was the talk of Wall Street in 2008 after global markets nosedived and traumatised investors tried to figure out how they could protect themselves from extreme or “black swan” events—those well outside an ordinary distribution of outcomes—that cause massive losses. Interest is revving up again as revolutions in the Middle East and Japan’s earthquake have destabilised markets and increased volatility, leaving battered investors searching anew for protection.
See article at: “Fat-tail attraction,” The Economist, March 24, 2011
Vinod Khosla, [co-founder of Sun Microsystems and] founder of Khosla Ventures, a Silicon Valley venture-capital firm . . . is investing over $1 billion of his clients’ money in “black swans”—ideas with the potential for sudden jumps in technology that promise huge environmental benefits, easy scalability and rapid payback.
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“I am only interested in technologies that have a 90% chance of failure but, if they do succeed, would change the infrastructure of society in some radical way,” he says.
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“Ten years ago, no analyst in the world would have predicted 650m cellphone subscribers in India but only 300m people with access to latrines and toilets. Even five years ago, no one would have predicted the way that Twitter took off. These are the black swan outliers.”
See article at: “Betting on green,” The Economist, March 12, 2011
Thinking outside the box, however, we believe therefore it is time for GE to exit the nuclear business. We apply the new operational discipline enunciated by CEO Immelt in late 2008. To quote the CEO: “Assume a black swan!”
See column at: Howard W. Jenkins, Jr., “What GE Was Thinking in 2011,” The Wall Street Journal, March 19, 2011
In the short run, gold can be a safe haven in a time of crisis. We don’t know what the next crisis will be, but we have seen plenty of “black swan” events over the past two years alone; our markets and our world seem increasingly hard-wired to experience periods of crisis and calm. In this sense, gold can be seen as a short-term hedge, or a short-term speculative play on volatility.
See article at: Janet Briaud, “The Case for and Against Gold — Buy Gold: It’s a Safe Haven and Inflation Hedge,” The Wall Street Journal, March 14, 2011
I know the counter-argument. “Isn’t it true that gold is one of the few investments having a negative correlation with stocks or real estate? If so, shouldn’t you have some gold as a diversifier and a hedge against a ‘Black Swan’ event, and establish it as a core holding in your portfolio?”
See article at: Lewis J. Altfest, “The Case for and Against Gold – Don’t Buy: It’s a Gift, Not an Investment,” The Wall Street Journal, March 14, 2011
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