Image courtesy of UNEP / click image for original
The phrase “fat tails†became familiar to some people after the storm broke in 2008’s global financial crisis. A fat tail refers to the probability and consequences of a possible event that is outside the bounds of our normal expectations, find as defined either by our prior experience or by accepted theories – for example, link theories of the behaviour of financial markets.1 More specifically, it refers to the probability of an adverse event (such as a financial crisis) that is both more likely to occur than is “normally†expected, and that if it should occur could have catastrophic dimensions. [See www.fattails.ca and the lovely 2010 animated graphics in The Economist: http://econ.st/n9xYZq.]