Beyond Bell-shaped Illusions 2007-2010 Uncertainty and the Limits of the Normal Distribution

Beyond Bell-shaped Illusions 2007-2010 Uncertainty and the Limits of the Normal Distribution

Nassim Nicholas Taleb criticized in "The Black Swan" that the well-formed model of the normal distribution masks the roughness of the real world. The normal distribution controls events by means and standard deviations and treats extreme events as exceptions. In financial markets and social phenomena, however, it is the exceptions that have had the decisive impact.

During the global financial crisis of 2008, many financial institutions assessed risk based on the assumption of a normal distribution and failed to anticipate a simultaneous crash. The same was true of the pandemic of the new coronavirus, where a sudden shift that could not be explained by an average extension shook the entire society.

The fraudulent nature of the normal distribution is that it confuses what can be calculated with an understanding of reality. What is needed in times of uncertainty is a posture based on extreme events.