Only Fifty Years
Taleb reports that ten extreme days accounted for half the returns in a fifty-year market sample. He uses the example to argue that rare outcomes can matter greatly and that familiar Gaussian tools may obscure tail risk.
THE IDEA
Only Fifty Years
Let us return to the story of my business life. Look at the graph in Figure 14. In the fifty-year sample described here, the ten most extreme days in the financial markets represent half the returns. Ten days in fifty years. Meanwhile, we are mired in chitchat.
Clearly, anyone who wants more than the high number of six sigma as proof that markets are from Extremistan needs to have his head examined. Dozens of papers show the inadequacy of the Gaussian family of distributions and the scalable nature of markets. Recall that, over the years, I myself have run statistics backward and forward on 20 million pieces of data that made me despise anyone talking about markets in Gaussian terms. But people have a hard time making the leap to the consequences of this knowledge.
The strangest thing is that people in business usually agree with me when they listen to me talk or hear me make my case. But when they go to the office the next day they revert to the Gaussian tools so entrenched in their habits. Their minds are domain-dependent, so they can exercise critical thinking at a conference while not doing so in the office. Furthermore, the Gaussian tools give them numbers, which seem to be “better than nothing.” The resulting measure of future uncertainty satisfies our ingrained desire to simplify even if that means squeezing into one single number matters that are too rich to be described that way.
When to use it
Risk management in finance: examining tail exposure alongside summary measures such as standard deviation.
Investment analysis: testing how concentrated historical returns are in a few observations and how that changes across samples, without treating hindsight as a timing strategy.
Business planning: incorporate the possibility of extreme events in forecasts instead of relying solely on averages.
Decision-making under uncertainty: challenge the instinct to simplify complex distributions into single numbers.
FROM THEORY TO EVERYDAY LIFE
In practice
The Ten Days That Drove Returns
Taleb reports that ten extreme trading days accounted for half the returns in a fifty-year sample. The excerpt does not specify the market, dates, or return calculation, and the linked figure is not supplied. The claim illustrates his tail-risk argument rather than a rule for predicting which days to hold or avoid.
A MOMENT TO REFLECT
Put it to work.
How many of the most extreme days in your field account for most of your outcomes?
Where do your routine tools assume a distribution that you would question in a separate discussion? What would help you examine the mismatch?
What is one area where you might be ignoring the impact of extreme events?
Often confused with
CONTINUE THE CONVERSATION
Source texts
- The Black Swan The Impact of the Highly Improbable With a new section On Robustness and Fragility (Nassim Nicholas Taleb)