In statistics, the ‘tails’ of a normal distribution (the annihilation event on the left tail or the dream return on the right tail) are asymptotic.
Asymptotic is just a fancy word to describe how the two tails get closer and closer to the x-axis, but they never touch it.
To ‘touch the x-axis’ is to claim total certainty.
It is to know with certainty that passenger planes out of clear, blue skies, could crash into the twin towers of the World Trade Center.
It is to know with certainty that a tiny microbe could stop the motor of the world.
Or, how in 1798, Thomas Malthus famously ‘proved’ that humanity would starve because population grows faster than food. In effect, he thought he had identified a Left-Tail Risk with certainty.
He was mathematically right, but – as we now know – eventually wrong.
Where am I leading with this?
The Citrini Report is a great exercise in lateral thinking, and while the report does indemnify itself by making it clear that it must not be judged as Bear Porn; but merely as a Thought Exercise, it does eventually fall into that old-trap of doom-thinking (One of my clients regularly talks to me about the nuclear weapons that the US has lost and never recovered as a certain left-tail risk. He has been doing so for about a decade now! In his mind the Broken Arrows are a known left-tail risk. To me it’s just another futile exercise in trying to model left tail-risks!) while trying to model a future path from a break-through technology of today.
Mapping technology forward is a futile exercise because that sector’s graph of change is non-linear. Entire industries, like social media for example, couldn’t have been mapped forward when internet was at Ground Zero.
Whenever in doubt, review your asset-allocation models.
They must be resilient to left tail-risks when they eventually emerge.
That is the key.
And if you are still in doubt search up the image of a Normal Distribution.
You will never see the tails touch the x-axes.
That is a reminder.
That you may come up with the most plausible tail-risk and yet that sliver of a gap between the tails and the X-axis is the probability for the event you did not name.
To suggest otherwise is not research.
It’s prophesising at best.
