Christmas season is as good a time as ever to remind you that a probability distribution has two tails. Event distributions have been getting a lot of attention over the past several years, especially their tails.
It used to be that Wall Street was functioning on the basic idea that financial events were subject to something very like a normal distribution, also known as a bell curve. Since they saw stock and bond prices as largely random variations from the average, they saw the risk to their portfolios as relatively low.
Statisticians refer to this phenomenon as ‘kurtosis,’ which is based on the Greek word for ‘bulge’. Many seemingly random distributions with presumably smooth and symmetrical curves of risk, in reality have unseen bulges in them. The failure to anticipate these bulges is the basis of kurtosis risk: the idea that what you don’t see can hurt you. And if the bet is big enough, it could deliver a mortal wound.
What does all this have to do with Christmas? Well the Christmas story reminds us that the curve has two tails, a left one bearing bad tidings and a right one bearing good tidings. Christmas reminds us that there are white swans and black swans, but there are doves too.
The message of Christmas is that the universe is not a closed system, like a snow globe full of randomly shaken particles; that history has purpose and development; that not only is there kurtosis in the system, and not only does it exist on the right as well as the left tail of the curve, but that the bulges on the right are, in the long run, greater than the bulges on the left; that the mean itself shifts over time, sometimes right and sometimes painfully left, but over a period of ebb and flow, and since Christmas the mean ebbs forward, to the right.
In other words, Peace on earth, good will towards men.Mr. Bowyer is the author of "The Free Market Capitalists Survival Guide," published by HarperCollins, and a columnist for Forbes.com. This article was originally published at Forbes.com
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