The knowledge that black swans can and do occur holds important lessons for how we think about risk. Those who are trying to measure risk in the financial markets need to carefully distinguish risk, with its probabilities, from uncertainty, which cannot be measured. We have become increasingly vulnerable to black swans because our financial economy has come to play an ever-larger role in our productive economy.

In this podcast, based on his March/April 2008 Financial Analysts Journal article, Jack Bogle will discuss the inherent uncertainty surrounding financial markets and how the laws of probability are too often misapplied by market participants. What other black swans are lurking beyond the horizon, waiting to become part of financial-market history? Long before the recent wave of complex financial products, observers noted that the financial system was particularly prone to innovation. Indeed, the value of these financial “products”—stock-market futures and options—has overwhelmed the total value of the stock market itself. Now, one of the riskiest of derivatives, credit-default swaps, alone totals $45 trillion, an amazing nine-fold increase over the last three years. These swaps are five times the size of the U.S. national debt and three times the U.S. GDP. We have become increasingly vulnerable to black swans because our financial economy has swamped our productive economy.

Based on the following article: John C. Bogle, "Black Monday and Black Swans” Financial Analysts Journal, March/April 2008