Op risk and Black Swans

Risk analysis

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Nassim Nicholas Taleb (2004) makes an interesting distinction between what he calls type 1 and type 2 environments.1 He defines a type 1 environment as one where most of the contribution to randomness2 comes from the body of a distribution (let’s say the middle 99.9%). This broadly characterises randomness in the physical world, where the normal distribution is common. A type 2 environment is one where most of the contribution to randomness comes from a small number of extreme events in the

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