I read The Black Swan last month (it was OK), in which the author (Nassim Nicholas Taleb) repeatedly chastises the financial industry for using the Normal distribution for modeling and forecasting. I read in disbelief, thinking that there was no way that financial experts would use tools that make such simplifying assumptions. After all, a) financial data is not normally distributed, and the Normal distribution does not have “fat” tails to allow for rare events. I was wrong. Naked Capitalism explains why the Normal assumption is bad for financial data better than I can.
I’m feeling just a little nervous, because I taught introductory probability and statistics to a cohort of undergraduate engineering students last semester. We briefly discussed when it is appropriate to use certain distributions, so I hope my students absorbed the important messages.