NOTEBOOK OPACITY, Note 149

Why Is Fragility in the NonlinearI- There have been works on the link between risk and nonlinearity initially by Arrow and Pratt, then followed by a collection of authors such as Rothchild, Stiglitz, Machina, and others. These fellows were not option traders; their work was mistakenly focused on nonlinearity of preferences which they got wrong since preferences are not concave, but convex-concave & path dependent as shown by Kahneman & Tversky. What they missed is that the nonlinearity of probability of events automatically causes nonlinearity in survival, hence concavity of harm…

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