Tail risk
Also called: black swan risk
The risk of rare but very large losses, which averages and everyday experience tend to understate.
Many strategies earn small gains most of the time and suffer a large loss occasionally. Because the large loss is rare, it may not appear in a short record at all, making the strategy look safer than it is.
Example
Selling insurance against unlikely events collects small premiums for years, until one event costs far more than all the premiums earned.
Learn more in these lessons
- Probability and expected valueWhat is expected value, and why does it matter for investing?
- The risks of buying and selling optionsIs it riskier to buy options or to sell them?
Related terms
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