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SPOTTING A TAIL

Some models assume that financial data follow a typical bell curve (black), with data points clustered around an average and then tapering off quickly to either side. But a handful of extreme events can cause the curve to splay out in what is known as a long or fat tail (red).

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  • This graph is erroneous. Since the bell-shaped function is a probability density, the red function with heavier tails is drawn on a different scale, because the area under BOTH must equal 1. This is the kind of lack of rigor that causes confusion and misunderstandings among readers unfamiliar with complexity models. Not helpful. Please fix it.
    Claudio Cioffi Claudio Cioffi
    Feb. 21, 2012 at 9:18am
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