What is the black swan theory

What is the black swan theory : What is black swan theory ? A black swan is a rare event that is extremely difficult to predict and comes with a magnitude of consequences that can bring down economies societies and people. Here I'm going to discuss about what is the black swan theory. 

Black swan theory explanation

The black swan theory describes events that are extreme outliers and those that lie outside the realms of the regular expectations which end up creating drastic consequences in general.

There are three key attributes to the black swan event, here they are 

1. Rarity: The event is a surprise to the observer it is so rare that no one could have possibly anticipated it to happen. 

2. Extreme impact: The event carries a severe and catastrophic effect on society. 

3. Retrospective predictability: The event is regarded and rationalized as predictable in hindsight as it could have been expected.

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For example: The 2008 crisis as the lack of investors confidence in a bank solvency and decline in the credit availability led to plummeting stocks and commodity prices in a late 2008. 

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Summary of the black swan theory

The theory of the black swan is aimed not to push attempts to predict events like this but to build robustness against them find the means to capitalize on them and prevent tragic losses with these tapes. 

First acceptance of the black swan event to happen anytime bearing this in mind can take out the element of surprise allowing you to respond calmly and rationally once the event takes place.

Second sizing the opportunities they provide find the resilient companies that you can invest in when the stock market crashes and the share prices tumble after the market's recovery you can sell them high as you board them low. 

Third embracing diversification avoid putting all your eggs in one basket and split your capital across multiple investments. 

I hope that you enjoyed reading this quick summary of what black swan theory is and how you can use it to your advantage. 

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