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I think that people usually have a really good grasp of the extreme probabilities. They understand when a particular event has less than a 5% chance of occurring, or more than a 95% chance, for example.

I'm pretty sure behavioral finance teaches exactly the opposite. The principals of LTCM, N Taleb, black swans, fat tails, and AA losing to 8-3 all teach us that it is human behavior to equate the improbable with the impossible. In fact, it appears that Taleb basically makes his living off investors mistaking the improbable for the impossible


That is something entirely different -- that extreme events occur more often than would be predicted by a normal distribution. I agree that that is the case with investment returns, but it has nothing to do with the point that I am making.
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