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SSRN-Statistical Undecidability by Raphael Douady, Nassim Taleb

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Statistical Undecidability




Raphael Douady
Riskdata

Nassim Nicholas Taleb
NYU-Poly

October 12, 2010




Abstract:
    


Using the metadistribution of possible distributions for a given measure, we define a condition under which it is possible to make a decision based on the observation of random variable, which we call “statistical decidability”. We provide a sufficient condition on the metadistribution for the decision to be “statistically decidable” and conjecture that decisions based on a metadistribution with non compact support are always “statistically undecidable”. There is the need for a strong undefeasable a priori without which decisions are not statistically justified – an effect that is very significant for decisions affected by small probabilities.



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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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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

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nntaleb: Why did the CRISIS Happen? http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1666042

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nntaleb: Why did the CRISIS Happen?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1666042

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Abstract:
This paper —while a standalone invited essay written for a special crisis issue of New Political Economy — synthesizes the various technical documents by the author as related to the financial crisis. It can also be used as a technical companion to The Black Swan(2007-2010).

Keywords: Black Swan, Risk Management, Finance, Markets, Crisis

SSRN-The Risk Externalities of Too Big to Fail by Nassim Taleb, Charles Tapiero

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The Risk Externalities of Too Big to Fail


Nassim Nicholas Taleb
NYU-Poly Institute

Charles S. Tapiero
NYU Poly – Department of Finance and Risk Engineering

November 1, 2009


Abstract:     
This paper examines the risk externalities stemming from the size of institutions. Assuming (conservatively) that a firm risk exposure is limited to its capital while its external (and random) losses are unbounded we establish a condition for a firm to be too big to fail. In particular, expected risk externalities’ losses conditions for positive first and second derivatives with respect to the firm capital are derived. Examples and analytical results are obtained based on firms’ random effects on their external losses (their risk externalities) and policy implications are drawn that assess both the effects of “too big to fail firms” and their regulation.

Keywords: banking crisis, risk management, too big to fail

SSRN-Too Big to Fail, Hidden Risks, and the Fallacy of Large Institutions by Nassim Taleb

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Too Big to Fail, Hidden Risks, and the Fallacy of Large Institutions


Nassim Nicholas Taleb
NYU-Poly Institute; London Business School

May 2, 2009


Abstract:     
Large institutions are disproportionately more fragile to Black Swans.
This paper establishes the case for a fallacy of economies of scale in large aggregate institutions. The problem of rogue trading is taken as a case example of hidden risks where rogue traders and losses are considered independently and dependently of the institution’s size. Both independent and dependent loss and hidden positions are shown to lead to the paper’s conclusion, that size and economies of scale have commensurate risks that mitigate the advantages of size.