Power law
A relationship in which one quantity changes as a fixed power of another. In a power-law distribution, the chance of a value at least x falls in proportion to a power of x, so huge values are rare but far more common than in a normal distribution.
In plain English
Power laws describe city sizes, word frequencies, earthquake energies, the lifetimes of some technologies and the sizes of the biggest market moves. Their signature is that the pattern looks the same at every scale: the chance of going from 10 to 20 is the same as from 1,000 to 2,000. Averages from such data are unstable, because one giant value can dominate.
Uncle Gary explains
In the simplest Lindy model, the chance that something lasts to k times its current age is 1 in k, so a fix that has lasted ten years has a 50% chance of lasting another ten.
Why it matters for your money
Daily market returns have fat, power-law-like tails: crashes far bigger than a normal distribution allows happen every few decades. Risk models that assume a bell curve understate them.
Where we tested it
Related terms
All glossary terms. Educational content, not financial advice.