On the meaning of a black swan in a risk context

Abstract

In recent years there has been much focus on the so-called black swans in relation to risk management and decision making under uncertainty. A key issue has been the ability of risk assessment and probability theory to capture the black swans. In this paper we carry out an in-depth analysis of what a black swan means in relation to risk, uncertainty and probability: is a black swan just an extreme event with a very low probability or is it a more surprising event in some sense, for example an unknown unknown? We question how the black swans are linked to the risk concept, to expected values and probabilities, and to the common distinction between aleatory uncertainties and epistemic uncertainties. The main aim of this paper is to contribute to a clarification of the issue in order to strengthen the foundations of the meaning and characterisation of risk, and in this way provide a basis for improved risk management. The paper concludes that the black swan concept should be associated with a surprising extreme event relative to the present knowledge.