Tail risk is the risk of an asset or portfolio of assets moving more than 3 standard deviations from its current price in a probability density function.[1] This is often under estimated using normal statistical methods for calculating the probability of changes in the price of financial assets.
The normal distribution which can be used for calculating the probability of sudden asset price changes is particularly prone to this type of error. However, many if not most types of analysis are prone to this error to a lesser scale.