No. of Recommendations: 2

Most financial models including the Black-Scholes option pricing model assume that prices have a normal or bell shaped distribution. This is not so, prices exhibit a power law distribution which means that the outliers, the tails of the bell curve, are a lot fatter than in a normal distribution. Nicholas Taleb Nissim discussed this under the concept of "Black Swans"

and Benoit Mandelbrot talks about it in The Misbehavior of Markets:

Earthquakes, avalanches and many other natural phenomena follow the power law distribution: a few big ones, more middling ones and lots of small ones.

A sandpile is a good model of the power law, as you add grains of sand, you get various sizes of avalanches.

Denny Schlesinger
Print the post  



The 2009 BMW Method Conference has been cancelled, due to minimum attendance numbers not being met. We hope to continue the annual BMW Method Conference tradition next fall.

Learn about the first four conferences on the BMW Method Website.

The BMW Method FAQ

BMW Method Website
Annual Conference Videos and Other Resources & Services
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.