Risk Engineering

Black swans
The limits of probabilistic modelling


Overview

The term “black swan” was used in 16th century discussions of impossibility (all swans known to Europeans were white). Explorers arriving in Australia discovered a species of swan that is black. The term is now used to refer to events that occur though they had been thought to be impossible. In risk analysis, these are also called “unexampled events” or “outliers”.

Black swan They are more likely when your risk models include “fat tailed” probability distributions, where extreme events (in the tails of the distribution) have higher probabilities than a normal probability distribution. Fat-tailed distributions are infrequent in most measures of physical populations, but can be caused by mechanisms such as preferential attachment in social networks and “winner takes all” mechanisms. They can also be caused by correlation between different risk categories, which lead to systemic risks.

Methods for coping with black swans include stress tests, horizon scanning exercises, improving your “safety imagination”, logics of precaution, and increasing system resilience.

This submodule is a part of the risk management module.

Course material

Black swans, or the limits of probabilistic modelling

Lecture slides (PDF)
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