Every Trader Must Know Event “Black Swan”

Every trader Must know black swan

Unpredictable and inescapable economic, political, and social accidents referred to as “black swans.” The creator of the black swan hypothesis and former Wall Street trader Nassim Nicholas Taleb refers to them as precisely this.

At the same time, the author is aware that “black swan” events are not the only ones that can happen. He listed the rise of personal computers, the Internet, and significant scientific advancements as three positive changes of equal priority.

What Exactly Black Swan Theory?

Black Swan Events: An Overview and Theories

The American trader of Lebanese descent Nassim Nicholas Taleb wrote “The Black Swan. The Impact of the Highly Improbable” in 2007, one year before to the start of the world economic crisis. He referred to major mishaps that have an impact on all facets of life as “black swan events.”

The black swan event, in the author’s opinion, always satisfies three requirements:

It ought to surprise the onlooker.

It should have a substantial impact.

People will gradually uncover prerequisites for it, as though they should have expected it.

In actuality, black swan events used to describe practically all rapid transformations. You can read about similar events in any history textbook; for instance, read about the Great French Revolution. The reader will first encounter a passage containing criteria that made clear after the revolution had already occurred.

Our Beliefs Altered By Black Swan Incidents:

Taleb wrote an article for The New York Times in 2007 to coincide with the publication of his book in which he discussed the impact of “black swans” on our fundamental conception of the universe:

“A single observation can refute a generalization built on millions of white swan observations over thousands of years. All you need is one black bird, which is, shall we say, very ugly.

In other words, such occurrences radically alter our perception of the universe, showing that everything founded on a sketchy, maybe illusory, framework. Human nature compels us to base our predictions on earlier historical occurrences. In the absence of prior knowledge, it may be hard to anticipate a brand-new event.

This thesis encourages skepticism of any professional evaluations and projections that are based on widely accepted theories and formulas. Taleb contends that investment methods are no more reliable than astrology. No one will be able to prepare for the market crash or, on the other hand, the spectacular expansion of specific assets that could result from the first “black swan occurrence.”

The ‘Black Swans’ author explains:

“We predicted oil consumption for 30 years in advance without comprehending that we cannot predict how the summer of 2017 will be. I have to check myself to make sure I’m awake because the cumulative errors in political and economic forecasts are so horrifying.

Taleb uses the historical occurrences of September 11, 2001, in New York as evidence to support his claims. Since such a turn of events seemed the most unbelievable at the time, nobody objectively evaluated all the risks.

Taleb applies the “black swan” hypothesis to well-known individuals who underappreciated in their lifetimes, including Edgar Allan Poe or Arthur Rimbaud. He thought we would have had time to realize their talent, which was far ahead of its time, if we had abandoned the conventionally reasonable attitudes.

Trader Must Know Event “Black Swan”
Trader Must Know Event “Black Swan”

Why Do Black Swan Events Occur?

Black Swan Events: An Overview and Theories

Even while “black swan” events may be the result of history’s normal path, they differ from “white swan” events in that they are unpredictable. Why? Because people ignore the events that take place before the disaster.

The main errors that prohibit us from foreseeing “black swans” in the future are listed below:

Bubble impact Information and viewpoints that are popular in their environment or among individuals they perceive to be authorities tend to be more trusted by people. Everything that goes against this in this situation is disregarded.

The overuse of mathematics in practical situations. For instance, game theory is frequently used to forecast the chances of winning a lottery or a game of chance. In practise, everything is considerably more intricate, and even those factors that we do not know should be taken into account.

Retrospective analysis is used when attempting to forecast future events using data from the past. The primary error here is assuming that we are knowledgeable enough to forecast the future and that everything will unfold as expected. The First World War’s lessons were ineffective in averting the Second.

The bad news is that you probably won’t notice the things that may cause accidents in the future if you’re looking for black swan indications. There are way too many options that we choose to ignore.


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