Extreme price action like we witnessed in the GameStop share price have been previously coined “black swan” or “6-sigma” events but these metaphors have become somewhat hackneyed given that purportedly 1 in 10,000 year events happen every couple of years. The reality is more prosaic and a more likely explanation is that even sophisticated market participants like hedge funds misprice the risk around low probability events, known as tail risks, incorrectly. To use a simplified example, Melvin Capital forecast it would return a profit of $0.89 on its short position on GameStop by projecting a 99% chance of GameStop trading lower, for a $1 gain and a 1% chance of GameStop trading higher with a $10 loss. With the benefit of hindsight, while the probability of a higher share price was still just 1%, a more accurate projected outcome should have been closer to a loss of $5,000 than $10!