What Is a Black Swan?

Black Swan Events Explained

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A “black swan” is an event with a very low probability of occurrence that produces catastrophic outcomes when it does occur. Retired New York University professor and former derivatives trader Nassim Taleb popularized the term in his book by the same name: “The Black Swan: The Impact of the Highly Improbable.” He describes a black swan as having three properties: high unpredictability, potentially severe consequences, and being retrospectively predictable. 

What Is a Black Swan?

Nassim Taleb’s three properties of black swans suggest: 

  1. They are outliers in the sense that their likelihood of occurrence is far outside the range of normal expectation. 
  2. When they do occur, they produce significant impacts. 
  3. We tend to see clear explanations for them after the fact—what we call retrospective predictability.

Willem de Vlamingh discovered black swans in Australia in 1697. Since a black swan had not been previously observed, Europeans believed that all swans were white. The Roman satirist Juvenal even referred to a black swan to describe something as impossibly rare, much like the modern-day phrase: “When pigs fly.” 

How a Black Swan Event Works

The general premise of black swan theory is that unpredictable events can have severe economic or financial market consequences. Importantly, events can be unpredictable due to an accumulation of similar and repetitive experiences.  

According to Taleb, the black swan problem in its original form is this: “How can we know the future, given [our] knowledge of the past?” In other words, how can we form general conclusions from our specific experiences when we haven’t experienced all there is? Just because we have only seen white swans doesn’t mean that black, pink, or any other-colored ones don’t exist.

Taleb illustrates an overreliance on past experience with the example of a turkey that is being raised for Thanksgiving. Over the course of the turkey's life, it is fed daily, creating an expectation that it will, in fact, be fed the next day. Each day the turkey is fed, the belief is reinforced until the day before Thanksgiving, when it will “incur a revision of belief.”  

This is a simple and easy-to-understand illustration of the black swan phenomenon. When we continue to experience the same thing, such as seeing only white swans or being fed every day, we tend to believe that will be our experience in the future.


Sometimes it takes a dramatically different and unexpected experience to change established beliefs.

Example of Black Swan Events

To illustrate the other tenets of black swan events—significant economic impact and retrospective predictability—we’ll consider a few examples.

Subprime Mortgage Crisis of 2008

The subprime mortgage crisis that began in 2008, also known as the Great Recession, led to one of the worst economic periods in the history of the United States since the Great Depression. It exhibits all three traits of a black swan.

  1. It was unexpected: Economic policymakers, particularly at the Federal Reserve, largely did not expect the subprime mortgage crisis. In fact Alan Greenspan, chairman of the Federal Reserve at the time, later said in an interview with David Rubenstein, “You can't have a crisis of that nature that is not a surprise.”
  2. It had a significant economic impact: The unemployment rate doubled during the Great Recession, peaking at 10%. There were also nearly 3.8 million home foreclosures between 2007 and 2010 that occurred as a direct result of the steep drop in the housing market and its ripple effects.
  3. It is retrospectively predictable: The Great Recession has been studied and discussed at length. It is now clear to most economists and even interested casual observers that the loose lending policies in the subprime market were the major cause of the mortgage crisis. These policies included making loans to less-creditworthy borrowers, often with adjustable rate mortgages, and securitizing those loans to resell in increasingly opaque arrangements.

Dot-Com Bubble of 2001

The stock market rose to unprecedented heights in the late ’90s and very early 2000s as a result of overvalued and overhyped tech companies. The crash that resulted was extreme and, in hindsight, predictable.

  1. It was unexpected: Investors poured money into tech companies during the mid- to late '90s, driving tech stocks to record highs and creating an overvalued bubble. The high valuations were disregarded because investors had become convinced that the internet had made everything different this time around. The high level of investment demonstrates that people did not expect the tech sector to experience such a major decrease in value.
  2. It had a significant economic impact: On Monday, March 13, 2002, the bubble popped and the Nasdaq fell 78.4% by October of 2002, which also precipitated job losses as the tech sector contracted. Employment in the tech sector shrunk by 17.8% by 2004.
  3. It is retrospectively predictable: Since the bubble burst, blame has been cast on either irrational investors pushing prices up, highly available venture capital, or the Federal Reserve’s use of monetary policy to slow the economy.


COVID-19 was an impactful and somewhat unexpected occurrence that some may classify as a black swan. But Taleb disagrees that the COVID-19 pandemic is a black swan, largely due to the first characteristic of expectability. Epidemiologists and other public health officials do not view major pandemics as random, unforeseen events, but inevitabilities.

Flash Crash of 2010

A flash crash is a sudden and sharp decline in stock prices. The flash crash of 2010 was caused by manipulation of automated trading algorithms, for which British futures trader Navinder Sarao claimed responsibility.

  1. It was unexpected: There was no “build up” to the Flash Crash. It was a sudden event, and as such, no one expected it.
  2. It had a significant economic impact: The market lost nearly $1 trillion in a day. The Flash Crash also prompted tighter regulation of trading activity, namely the establishment of “circuit breakers,” which are temporary trading halts when security prices move beyond certain limits within an established timeframe.
  3. It is retrospectively predictable: Sarao had manipulated the market in his favor by mimicking demand with “spoof orders” and causing the crash.

One lesson to take from black swan theory is that there are always unknowns that can affect financial markets. It’s therefore prudent to take fundamental precautions by diversifying your investments and holding an asset allocation appropriate for you that is designed to weather market ups and downs.

Key Takeaways

  • Black swans are highly improbable, make a significant impact, and are explainable after the fact.
  • Prof. Nassim Taleb popularized the term in his 2007 book “The Black Swan: The Impact of the Highly Improbable.”
  • The 2008 subprime mortgage crisis is a good example of a black swan event. 
  • Understanding black swan theory can help investors protect themselves by encouraging them to follow fundamental investing principles.
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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Nassim Taleb. "The Black Swan: The Impact of the Highly Improbable," Page 40. Random House, 2012.

  2. Bloomberg. "Greenspan Says Nobody Forecast the 2008 Financial Crisis."

  3. Federal Reserve Bank of Chicago. "Have Borrowers Recovered From Foreclosures During the Great Recession?"

  4. U.S. Bureau of Labor Statistics. "Great Recession, Great Recovery?"

  5. Federal Reserve Bank of St. Louis. "Tech Employment Returns to Dot-Com Heights."

  6. Yahoo Finance. "Nasdaq Composite Historical Quote."

  7. U.S. Securities and Exchange Commission. "File No. S7-02-10."

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