Tail Risk

The risk of extreme events occurring with low probability but high impact. Tail risks represent the outer portions of a probability distribution, typically three or more standard deviations from the mean. Examples include major natural disasters, terrorist attacks, or systemic financial crises. In RBPM, tail risks require special consideration through scenario planning, stress testing, and contingency planning, even when their probability is low. Management teams should regularly conduct "tail risk meetings" to discuss potential high-impact, low-probability events and appropriate responses.