Fat tails
A distribution has fat tails when extreme outcomes happen much more often than a bell curve would suggest. The average can look calm while rare, huge outcomes carry most of the risk.
In plain English
In a bell-shaped world, results far from the average are vanishingly rare. In a fat-tailed one, they're rare but not that rare, and enormous when they come: project overruns, market crashes, insurance losses. Averages and typical cases understate the risk. Ask how bad the worst 10% or 20% is and how often it happens, and plan for that.
Uncle Gary explains
In a study of 1,471 IT projects, the average cost overrun was 27%, but one in six overran by about 200% on average. A portfolio of twelve such projects contains at least one of those 89% of the time.
Why it matters for your money
'The average year in the stock market is +8%' says nothing about the year that falls 20% or more. Savings plans need to survive the tail, not the average.
Where we tested it
Related terms
All glossary terms. Educational content, not financial advice.