Part I sets up the one question in finance that decides whether our own instrument is sound, and states the separating observation. The question is how much variation and randomness the distribution of market returns should display, and how important outliers are in determining the behaviour and parameters of the system. Efficient-market orthodoxy holds that prices are always correct and returns follow a known fixed distribution, the bell curve, which describes daily moves adequately in normal times and fails completely in volatile ones; on that view crashes are statistical anomalies to be removed from the dataset. Mandelbrot, Minsky and Taleb hold that the large moves are endemic and integral, and that the skewed distribution of returns reveals scaling and power laws produced by the market's inherent instability. One camp treats the tail as noise to be excluded, the other treats it as the signal.

Evidence 1 passage

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see these huge market moves as an endemic and integral part of the functioning of financial markets. They argue that the skewed distribution of returns indicates the presence of scaling and power laws which are a product of the financial market’s inherent instability. In order to understand which of

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