The Black Swan Theory
The Simplest Explanation of Risk and Uncertainty
Good morning everyone,
It really is as scary as the title of this article suggests. A black swan event is one of unpredictable nature and circumstances.
You can’t foresee something that there is no planning for, like the 2008 financial crisis and the 2020 pandemic. People have been trying to plan for these types of events since, well, the first black swan. But, people fail to remember that there is no planning for the unpredictable.
What is the Black Swan Theory?
The Black Swan Theory is a metaphor for the idea that there are events that are so improbable and so important that they cannot be predicted.
Nassim Nicholas Taleb created the theory in his book "The Black Swan: The Impact of the Highly Improbable," “ published in 2007. He uses the metaphor to describe rare and extreme events, such as a black swan being found in Australia.
This theory is related to the study of probability based on past data. It can be used to predict future events by assuming they will follow a pattern similar to past events.
The problem is that there is no amount of past data and study of probabilities that will lead you to predict a black swan event.
What are the Benefits of The Black Swan Theory in your Life?
As I said before, The black swan theory is a metaphor that Nassim Nicholas Taleb first introduced. It refers to an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.
The black swan theory can be applied in everyday life in order to anticipate events that may come as a surprise and have significant effects. One way to prepare for such an event is by understanding the risks involved and how to deal with them. This will help us make decisions under uncertainty, which are more likely to lead to positive outcomes.
When I say “understanding risks,” I mean all risks. When companies file with the SEC (security and exchange commission ), they have to list all of the risk factors when investing in their company.
For example:
Coinbase, the multi-billion dollar crypto company, recently went public. In their risk factors, they listed the chance that if the creator of bitcoin, “Satoshi Nakamoto,” was revealed, bitcoin could go straight to 0. Making that a big risk if you plan on investing thousands of dollars with them.
But events like these are precisely what I mean when I say “black swan events.” Things that are so unlikely that most people just forget about them, but the consequences of said events are astronomical in comparison.
How to Use the Black Swan Theory in your Life.
Most people don’t think about how they can apply The Black Swan Theory to their everyday life because of its nature of being so unpredictable, but you can.
Here’s how:
1) Identify what you want to achieve.
2) Identify your assumptions about how things work.
3) Recognize when you are wrong.
Steps two and three are the most important, in my opinion. Not that choosing what you want to achieve isn’t a crucial step in the process, as that will often determine your success off the bat.
However, when identifying your assumptions about how things work, you should automatically assume that you are wrong. That’s where step three gets a little intertwined, but it’s simple.
Whatever you think you know about how the world works, you’re wrong. I know this because I am too. We can only perceive and interrupt the world through limited life experiences. More often than not, they tend to lie to us so that we can justify and rationalize what doesn’t make sense to us.
But, in step three, you must recognize you are most likely wrong, then accept that fact and use that gained perspective to form a more clear idea of how things work.
You aren’t going to be able to predict the unpredictable like black swan events. However, you will have the tools and capabilities to deal with these events when they come because you will know that whatever you think is the reason for the event happening is probably wrong.
This is valuable because most people are arrogant, believing whatever is presented in front of them combined with their own life experiences. But now, you can look past that and gain insights that will help you learn from the past.
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As always, have a great rest of your day, and remember to live in the moment.
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