Tail Risk
The 1-in-a-trillion crash that shows up every decade. Here's why your model lied to you.
Grounded in the research on tail risk
1. Spot the tail
Plot every daily return of an asset and you get a bell-ish curve. Most days cluster in the fat middle. The far left edge, the thin sliver, is the tail: rare days where you lose a brutal amount. Tail risk is the risk of living in that sliver. Not a 2% dip. A 30% gap-down that vaporizes a year of gains overnight. The middle is boring. The tail is where you get wiped out.
2. The normal-curve lie
Finance 101 assumes returns are normally distributed, so anything past three standard deviations is basically impossible. Black Monday, October 19, 1987, the S&P dropped 22.6% in a single day. Under a normal curve that's a ~20-sigma move, odds so small it shouldn't happen in the lifetime of the universe. It happened on a Monday. The model wasn't unlucky. The model was wrong.