Beware the Long Tail
Economic models of risk don’t add up, cadre of researchers caution
When H. Eugene Stanley heard that Lehman Brothers had filed for bankruptcy, a small part of him was thrilled.
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Of course, the news was distressing. The firm’s seismic collapse had disastrous consequences, not only for the global economy but also for Stanley’s daughter-in-law, who became instantly unemployed. But Lehman’s downfall was exactly the kind of rare event that Stanley, a physicist at Boston University, had been expecting.
“Many economists will tell you that the chances of something really big and bad happening are really, really small,” Stanley says. But when viewed through a different lens, he contends, catastrophic events — such as Lehman filing for bankruptcy in 2008 — aren’t exceptional but inevitable.