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Tails risk (fat tails risk) otherly known as Zero-One law

Smart Finance

Staff member
Feb 23, 2021
While working on Version 2 of the eBook i am writing a small piece upon model called tails risk. I have never really heard nor seen anyone in the financial area talk about this before and thought it may interest someone.

“Anything that is huge, profitable, famous, or influential is the result of a tail event - an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. when most of what we pay attention to is the result of a tail, it's easy to underestimate how rare and powerful they are.”

Tails events are also known as Zero-one law. It’s a probability theory that specifies an event - tails event. These tails events are rare but they do happen with a chance of zero or 1 (100%) chance. Events such as the financial crisis of 2007/2008, Coronavirus, the products you use today and the services you use are all tails events.


On a side note there is an investing risk called a tails risk, sometimes called “fat tails risk). This is the financial risk of an asset or portfolio of assets moving more than a standard deviation from the current share price, more than the normal price movements. The tails risk includes low-probability events occurring at both ends of the curve (Gain & Loss), otherly known as tails risk. Normally us investors are more worried about unexpected losses rather than gains.