Financial crashes are rare events, but these rare events have direct impact on any risk assessment, the pricing of risk assets, and portfolio structuring. The impact of these rare events is through the probabilities that investor may associate with them. If the price of any security is the discounted value of future prices times their probability, a higher weight for negative events will pull down expected prices.
There can be a significant impact on performance if the probability assessments for rare events are wrong. If rare events are under appreciated or given too low a probability, risky assets may be over-represented. Similarly, if a risk assessment is given too high an assessment, money will be left on the table because risky assets will be under-represented in the portfolio.
The results show that investors place, on average, a probability of approximately 20% to the chance of a rare case event in the next six months. This is an odd assessment given the actual probabilities are more likely to be less than 1 percent. It seems too high relative to actual occurrences.