There’s a fascinating statistical phenomenon called a “fat-tailed distribution” that shows up in several places in economics, sociology, ecology, and elsewhere. These distributions describe situations where a large part of a population sits very close to the average on some measure, but a handful of outliers have a hugely disproportionate impact.
Fat-tailed distributions are at the heart of Nassim Taleb’s idea of “black swans”, or apparently unlikely events that nevertheless happen. Most trading days on the NYSE are relatively boring, but a handful of extreme swing days are responsible for a huge part of long-term price movements.
It turns out that the number of employees at companies also has a distribution with very fat tails.
In a note on the state of America’s small businesses, Deutsche Bank chief international economist Torsten Sløk pointed out that an overwhelming number of American firms are small businesses with fewer than twenty employees:
Despite the extremely large number of small companies, it turns out that the relatively tiny group of outlier large firms are responsible for a hugely outsize share of actual employment. While only about 0.3% of US firms have over 500 employees, those large companies account for half of employment:
This works as another example of how in many cases, outliers are extremely important.
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