The Black Swan Theory Explained

The Black Swan Theory Explained
This is a Guest Post by AK of Fallible
AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.
In this video you’ll learn about black swan theory, which the famous author and quant trader Nassim Taleb made popular. Once you understand this black swan concept you’ll be able to protect yourself from the most dangerous market events — the type that wipe out people’s life savings and force them to start over from zero. You’ll learn to avoid the pain and disgust that comes with those types of disasters. And you won’t have to stay glued to your screen watching every tick in the market to do it either. So make sure to pay attention to this video you know how to correctly position yourself in the market.

A black swan is a highly improbable event. There are three characteristics that define a black swan. First, it’s unpredictable. Second, it has a massive impact. And third, after it happens everyone comes up with some explanation for it that makes it seem like it actually wasn’t random and could have been predicted.

In markets, if you’re not prepared for a black swan, you’re going to end up losing a lot of money. But the question is, how can you prepare if these events are unpredictable?

The first thing you have to do is realize that your predictions and forecasts are not foolproof. No matter how much you study markets, and how much you think you know, there are always going to be unknowns you have to deal with. And not only will there be unknowns, but there’ll even be unknown unknowns. So you won’t even know all the stuff you don’t know! And in a complex system like the market, there tends to be a lot of those. If you don’t accept this, you’re going to keep getting surprised when the “impossible” happens.

There are a number of things you can do make sure your strategy becomes robust enough to survive a black swan. I explain all of them and more in the video above. Make sure to watch!

And as always, stay Fallible investors!


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