Mild vs. Wild Randomness: Focusing on those Risks that Matter

Conventional studies of uncertainty, whether in statistics, economics, finance or social science, have largely stayed close to the so-called “bell curve”, a symmetrical graph that represents a probability distribution. Used to great effect to describe errors in astronomical measurement by the 19th-century mathematician Carl Friedrich Gauss, the bell curve, or Gaussian model, has since pervaded our business and scientific culture, and terms like sigma, variance, standard deviation, correlation, R-square and Sharpe ratio are all directly linked to it. Neoclassical finance and portfolio theory are completely grounded in it.