Financial models based on normal distributions often fail to account for rare catastrophic events

Long-Term Capital Management (LTCM) was a hedge fund led by Nobel Prize-winning economists who used Gaussian distributions to predict market behavior. Their models suggested that the chance of a major loss was so low it would only occur once in the lifetime of the universe. However, when Russia defaulted on its debt in 1998, market correlations spiked in ways their 'normal' distribution models could not fathom, leading to a $4.6 billion loss in just a few months.