| Fat Tail |
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| CATEGORIES ABOUT FAT TAIL | |
| probability distributions | |
| behavioral finance | |
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In finance, fat tails are considered undesirable because of the additional Risk they introduce. For example, an investment strategy may have an expected return, after one year, that is five times its standard deviation. Assuming a normal distribution, the likelihood of its failure (negative return) is less than one in a million; in practice, it may be higher. Normal distributions that emerge in finance generally do so because the factors influencing an asset's value or price are mathematically "well-behaved", and the Central Limit Theorem provides for such a distribution. However, traumatic "real-world" events (such as an Oil Shock , a large corporate bankruptcy, or an abrupt change in a political situation) are usually not mathematically well-behaved. |
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