I was reading professor Sanjay Bakshi’s “Understanding the Universe of the Unknown and the Unknowable” talk hosted by The CFA Society in New Delhi on 4 March. You can download the slides with notes from here.
I specially liked this two slides. Contrary to popular belief we live in a power law world than the bell curve world.
Normal distribution vs Power law distribution.
If 1,000 random people gather in a stadium and the world’s tallest man walks in, the average height doesn’t change much.
But if Bill Gates walks in, the average net worth rises dramatically. At $80 billion, 99.9% of total wealth of this crowd will come from one man. Indeed, all the others would represent no more than the variation of his portfolio’s value over the past few seconds.
Height follows the bell curve in its distribution. Wealth does not. It follows a L-shaped distribution called “power law” where most values are below average and a few far above. In the realm of the power law, rare and extreme events (the black swans) dominate the action.