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In economics and finance , a Taleb distribution is a term coined by U.K. economists/journalists Martin Wolf and John Kay to describe a returns profile that appears at times deceptively low-risk with steady returns, but experiences periodically catastrophic drawdowns. It does not describe a statistical probability distribution , and does not have an associated mathematical formula. The term is meant to refer to an investment returns profile in which there is a high probability of a small gain, and a small probability of a very large loss, which more than outweighs the gains. In these situations the expected value is (very much) less than zero, but this fact is camouflaged by the appearance of low risk and steady returns . It is a combination of kurtosis risk and skewness risk : overall returns are dominated by extreme events (kurtosis), which are to the downside (skew). The corresponding situation is also known as the peso problem .
Milton Friedman became lord king guru of the world's economists by standing up at the end of 1966 and warning everybody that the high-pressure economics of the Kennedy-Johnson administration was about to make inflation a real problem. Raghuram Rajan stood up in 2005 and warned everybody that increased financial complexity had made the world's financial markets riskier places. He is now my guru--along with Michael Mussa. Justin Lahart tells the story:
It ran in The Saturday Evening Post on Sept. 14, 1929. A month later, the stock market crashed. “Everyone wants to think they’re smarter than the poor souls in developing countries, and smarter than their predecessors,” says Carmen M. Reinhart , an economist at the . “They’re wrong.