Looking for Black Swans: Building a Risk Management Context for Identifying Extreme Risk Events and Outliers in Business Models

This Financial Insights Perspective presents the concept of a "black swan" in the context of the current global financial crisis. The term was popularized by Nassim Nicholas Taleb in his 2007 book titled The Black Swan. In this book, Taleb derives a historical context for random events, probability theory, and the rare high-impact events. The term black swan is used in the context of this document to acknowledge that very rare events can and do occur, and we then explore how enterprise risk management (ERM) can prepare an institution for black swan events. Regardless of the level of regulation, financial planning, organizational risk awareness, and sophistication of ERM programs, the components to create black swan risk events exist, and these events can occur. An organization's exposure to black swan events needs to be openly considered and factored into an overall ERM program.