A Black Swan is a higly improbable event that:
– It is unpredictable
– Has a massive impact
– After the event we make up an explanation that makes it less random and more predictable.
It happens because we focus on things we already know, and never take into consideration what we don’t know (see the link in here to the “known unknows” and “unknown unknows” from Rumsfeld).
We are therefore unable to truly estimate the opportunities, too vulnerable to the impulse to simplify, narrate and categorize, and not open enough to reward those who can imagine the impossible.
Black Swans ocurs because of the weak signals between cause and effect, which are also difficult to determine under complexity.
One formal property of complex systems is that the size of the worst event that can happen is an exponential function of the system scale. This means that when a complex system’s scale is doubled, the systemic risk does not double; it may increase by a factor of 10 or more.
“… the size of the worst event that can happen is an exponential function of the system scale…”. This links to the idea of “fragility” in Taleb.
This kind of sudden, unexpected crash that seems to emerge from nowhere is entirely consistent with the predictions of complexity theory. Increasing market scale correlates with exponentially larger market collapse.
However, this happens as long as fragility remains high. Why? because the resilience of the system is also an exponential function of the scale. This means that you need much more things to go wrong at the same time for the crash to happen.
Comments by Luis G de la Fuente