Black Swan Theory

What is Black Swan Theory ?

The Black Swan Theory refers to a large-impact, tough-to-predict, and rare event beyond the realm of normal expectations. The term Black Swan comes from the assumption that ‘All swans are white’. In that context, a black swan was a metaphor for something that could not exist or not possible.

The “Black Swan” theory refers to events of large consequence and their dominant role in history. Black Swan events are a special category of what is called outliers.

black swan theory

What has Black Swan theory got to do with Indian Markets?

The Indian Stock Markets hit the upper circuit of 10/15/20% in 2009,  an event which did not happen before. This is a Black Swan Event, a rare event – no one expected.  This is a Black Swan for the bears since markets have hit lower circuit many times before, but not the upper circuit.

Identifying a Black Swan Event.

1. The event is a surprise.
2. The event has a major impact.
3. After the fact, the event is rationalized by hindsight, as if it had been expected.

As of today, global markets including the Dow Jones, S&P 500 and  Nifty 50,  hitting all-time highs, any event that could bring down the markets could be a black swan event. No one knows what it is, until it happens!

Another example of a Black Swan Event – Your stock broker gives a buy call and it works  🙂