Posts Tagged ‘fat tail’

Long Tail and Fat Tail

The Long tail is the concept that there are large number of customers who’s unique needs (in small quantities) are not addressed 400px-longtailby the high-volume products.  It is often represented as a the power law distribution curve.  The idea goes further with internet technologies and other happenings, which lower costs for product development and/or distribution.  Over time, the demand curve could shift away from the high-volume product, making the tail longer and fatter.

fat-tailThe Fat tail is a different concept where the probability of events away from the mean might be significant.   Traumatic events (e.g. oil shock, political turmoil) could disrupt the well-behaved mathematical models of financial investments, incurring considerable more risks than estimated.    The variance might not be finite.  In some situations, achieving six-sigma might not provide the comfort of high quality or the feeling of being safe.

Both concepts are part of the evolving maturation of our outstanding of uncertainty and risk.  The world may not be simply be modeled by the bell curve and/or the Central Limit Theorem.

Copyright (c) 2008 by Waiming Mok


Read Full Post »