Fat Tails

Fat tails refer to the phenomenon in probability distributions where extreme outcomes (very high or very low events) are more likely than they would be in a standard normal distribution, which has thin tails. This means that rare events, such as severe financial losses or natural disasters, occur more frequently than expected. In practical terms, when assessing risks or making predictions, relying solely on average or typical scenarios can underestimate the likelihood of these impactful but rare events, leading to misguided decisions in fields like finance, insurance, and environmental studies.