Fat Tail

A "fat tail" refers to a situation in probability or statistics where extreme events—such as large financial losses or rare natural disasters—occur more frequently than predicted by normal models. Unlike the familiar bell curve, which shows most outcomes clustering around an average with very few extremes, a fat-tailed distribution indicates a higher likelihood of extreme events, meaning the "tails" of the distribution are thicker. This concept is important for understanding risks that have the potential for rare but impactful outcomes, emphasizing the need to prepare for more extreme possibilities than standard models might suggest.