The Black Swan Theory serves as a reminder to investors that unpredictable events can radically change our lives, society, and the markets.

The Black Swan Theory, based on a recent book by Nicholas Nassim Taleb called “The Black Swan: The Impact of the Highly Improbable,” analyzes how events that were completely unexpected, or perhaps considered impossible, radically changed the world.

Historical events such as the attacks of September 11th, 2001 and the invention of the personal computer are categorized as Black Swans: they were unforeseeable, and their enormous impact on human civilization was only explainable in hindsight, according to Dr. Taleb himself.

This notion supports the idea of a “Random Walk,” as in the Efficient Market Hypothesis, which suggests that because tomorrow’s news is entirely unknowable today, investors must learn to respect the fact that short-term predictions are not likely to account for the amount of uncertainty present.

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