Normal Distribution Model

The normal distribution model, or Gaussian distribution, is a symmetrical probability distribution where most observations cluster around the mean. It is the foundation of many classical financial theories, including the original Black-Scholes option pricing model.

While mathematically elegant, it assumes that extreme events are virtually impossible. In reality, financial markets exhibit non-normal behavior, making this model a simplification rather than a perfect representation.

Traders use it as a starting point, but must add adjustments to account for real-world complexities. It serves as a benchmark for comparing actual market data.

Relying on it exclusively without adjustments is a primary cause of model failure.