Investing and trading are not mainly dictated by factors that affect the markets directly. They can also be affected by events that happen all around the world. That is why there can be some level of unpredictability that always follows investors and traders in terms of their decision making, whether to buy, sell or hold. But there are certain events that happen at any time and at any place in the world that investors and even the most experienced financial experts cannot predict. These events are known as “Black Swan” events.

What Is a Black Swan Event?

A Black Swan event refers to any event that happens suddenly and in a surprising manner that may also bring a major impact. These events are usually quite difficult to predict and they happen rarely for people to properly determine just how and when they will come. The impact that they might bring would go beyond normal explanations why they happened. These are events that are unexpected and of a large magnitude and consequence.

In the case of investors and traders, a Black Swan event may sometimes have a surprising effect. According to Nassim Nicholas Taleb, who wrote the book, “The Black Swan: The Impact of the Highly Improbable”, most people tend to develop a psychological bias or even a collective blindness to such events. One probable reason for this is that such rare events are not “computable” in the sense that such events are not being included in scientific methods of prediction and probability.

The very reason that people just can’t seem to determine the magnitude and effect of a Black Swan event using their normal scientific methods may lead to some people ignoring them. In the case of investors, they tend not to consider what a black swan event can do until after their effects may already be evident. At this point in time, investors not being aware of the potential outcome may once again be caught by surprise and see their probable gains vanish.

Coping Up With Black Swan Events

With possible Black Swan events like the recent Japan earthquake and tsunami as well as the wars in Libya and the other Middle Eastern countries, there might have been no market analysts who may have predicted these events from happening. Most may have formulated future market movements and other events from where they might be basing their investing and trading decisions. Some will try to stick with their formula despite the recent Black Swan events, which can put them in a situation where their risks may no longer be computable in a sense.

In such times, most scientific methods in investing and trading may no longer work effectively by themselves, unless they are reevaluated and analyzed considering the recent happenings in the world and considering them as factors. In the absence of having a means to predict Black Swan events, it pays to prepare for them at all times, whether they do or do not happen. In this case, some level of market intuition and gut feeling can sometimes become quite handy for the investor or trader. Diversification, constant monitoring and reevaluation also become important tools that can be used in the midst of Black Swan events and may be some of the means of trying to deal and prepare for them.