Monthly Archives: August 2010

nntaleb: Finished My Central Paper http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1669317

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nntaleb: Finished My Central Paper http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1669317

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Links to pdf download page for:

Convexity, Robustness, and Model Error
Nassim Nicholas Taleb
NYU-Poly
August, 31 2010
Abstract:
This discussion makes the distinction inside the Fourth Quadrant “Black Swan Domain” between fragile an robust to model (or representational) error on the basis of convexity.
• The notion of model error as a convex or concave stochastic variable.
• Why deficit forecasting errors are biased in one direction.
• Why large is fragile to errors.
• How economics as a discipline made the monstrously consequential mistake of treating estimated parameters as nonstochastic variables and why this leads to fat-tails even while using Gaussian models.
• The notion of epistemic uncertainty as embedded in model errors.
In addition, it introduces a simple practical heuristic to measure (as an indicator of fragility) the sensitivity of a portfolio (or balance sheet) to model error. Finally, it sets an explicit path to conduct policy based on robustness

Working Paper Series

Daily Kos: The Black Swan by Nassim Nicholas Taleb: A review

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The short:  I enjoyed the book and found it hard to put down.   It challenged some of my thinking and changed the way that I look at things.

What I didn't like:  the book was very inefficient; he could have conveyed the same message in about 1/3 of the pages.  

But:  the fluff/padding was still interesting; the author has a sense of humor and writes in an entertaining style.

What is the gist of the book?  Well, the lessons are basically these:

  1. Some processes lend themselves to being mathematically modeled, others don't.   Unfortunately, some people use mathematical models in situations where it is inappropriate to do so (e. g., making long term forecasts about the economy).  People who rely too much on mathematical modeling are caught unprepared (or just plain surprised) when some situation arises that wasn't considered possible in the mathematical model (e. g., think of a boxer getting in a fight with someone who grabs, kicks and bites).