Black Swans, probability of an outlier on top of an extreme tail event
What are the chances that an extreme tail event like a pandemic is followed by another outlier? asked my senior colleague and further nudged, pretty low, right? wanting to engage all of us and stir up a conversation amongst colleagues and global fora. Before I dive into sharing my views please allow me to indulge in a bit of mathematics – what are the chances of another outlier post an extreme tail event? Contrarian, as my response may seem to be, I would argue its ‘High’. The world loves simplification because that is what a human mind can absorb and fit into its logical neural circuits. But that’s precisely where the problem lies. More or less all analytics, economic, financial, geopolitical, or otherwise assumes Normal distribution of outcomes. The number of studies done, starting from Mandelbrot and Fama, proves otherwise but still, we choose to regress, consciously or unconsciously, to this convenient simplification. This convenient relapse, an amenity, allows one to limit the pro...