In the context of financial markets and risk management, the concept of "fat tails" refers to the propensity for extreme events to occur more frequently than traditional models would predict. This idea is embodied in the quote by Fama, highlighting the unpredictability and potential severity of market downturns. In "When Genius Failed," Roger Lowenstein explores how Long-Term Capital Management underestimated these rare but impactful events, ultimately leading to their downfall.

The book illustrates the consequences of ignoring the reality of fat tails in financial modeling. LTCM's reliance on sophisticated mathematical models created a false sense of security among its managers and investors. The narrative serves as a cautionary tale, emphasizing that, while innovative financial strategies can yield significant gains, they also come with the risk of unexpected losses when extreme market conditions arise.