The Mandelbrotian
The Mandelbrotian distribution describes a scalable, non-Gaussian distribution where extreme events, such as great wealth, are more likely than under a normal distribution, used to model phenomena like wealth in Europe.
THE IDEA
By comparison, look at the odds of being rich in Europe. Assume that wealth there is scalable, i.e., Mandelbrotian. (This is not an accurate description of wealth in Europe; it is simplified to emphasize the logic of scalable distribution.)
When to use it
Modeling income and wealth distributions to understand inequality
Analyzing financial market returns where extreme events (crashes, booms) occur more frequently than predicted by normal models
Studying natural phenomena like earthquake magnitudes or city sizes that follow power laws
FROM THEORY TO EVERYDAY LIFE
In practice
Wealth Distribution in Europe
Assuming wealth in Europe follows a Mandelbrotian distribution, the probability of being extremely rich is higher than in a normal distribution, illustrating how scalable distributions produce more outliers.
A MOMENT TO REFLECT
Put it to work.
How does the Mandelbrotian distribution change your view of wealth inequality compared to a Gaussian distribution?
Can you think of other real-world phenomena that might follow a scalable, Mandelbrotian distribution?
What are the implications of using a Mandelbrotian model for risk management in finance?
Often confused with
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Source texts
- The Black Swan The Impact of the Highly Improbable With a new section On Robustness and Fragility (Nassim Nicholas Taleb)