Since the appearance of the book entitled The Black Swan by Nassim Taleb in 2007 it has become fashionable to call unexpected catastrophes “black swans”. The idea behind the expression is that a swan is usually defined as being white. Black swans do exist, however, and have become a symbol of unforeseeable or scarcely foreseeable catastrophic events or developments. For example, Taleb was brought up in the Lebanon, and as a young man never imagined he would ever have to leave his native land, which at that time was politically stable, but this did happen – and a black swan was born.
The symbolism of the black swan is much older than Taleb’s popularization of the notion, being first used in a similar sense by Juvenal ca. 200 AD and again at the time of the Great Plague and Great Fire of London, in 1665 and 1666 respectively. [An inn in London at that time was actually called the Black Swan] In the last century the philosopher Karl Popper used the black swan to express the idea that scientific induction means that every theory must be potentially refutable, scientists as a matter of course searching for black swans – incontrovertible evidence that currently accepted theories are invalid.
Examples of black swan events in the real world – things that should never have happened, but nevertheless did – are the sinking of the Titanic, the emergence of AIDS, the destruction of the twin towers of the World Trade Centre or the collapse of the Lehman Bank. A black swan event may also consist of elements that are individually foreseeable, but the occurrence of several of them at one time constitutes the catastrophe. For example, the risks entailed by earthquakes, tsunamis and nuclear power stations were all familiar and in principle individually controllable, until 2011 when all three combined in Fukushima, thus creating a black swan in the form of a nuclear meltdown.
Although the black swan is an interesting metaphor, it is of limited usefulness. For example, at the turn of the century would a warning to life insurers that within twenty years the yield on government bonds might be close to zero percent have been any more plausible than a warning to property insurers that Düsseldorf could be hit by a force 8 earthquake? And Popper’s notion of a black swan is by definition unforeseeable and thus of no use for risk managers. A more practical and actionable concept is the emerging risk, the effects of which can be extrapolated, combined with other risks…