Link To Full Story: www.fooledbyrandomness.com
The result of that blog entry, and of a few other criticisms of Taleb in various places, is that Nassim has now published an extremely useful technical appendix to The Black Swan. It includes substantially all his relevant scientific and technical papers, and essentially comprises a gauntlet being thrown down to those who would criticize him. If you want to attack my ideas, he’s saying, that’s fine, but please first do me the favor of looking at where they’re laid out in detail, as opposed to where they’re laid out in newspaper quotes or in a literary book.
The Black Swan Technical Appendix
Some people make technical comments on a literary book (TBS was presented as aliterary-philosophical essay), but do not go after my technical works thatpresent analytical discussions and empirical evidence. I find it flattering (ifunchallenging) to only be attacked in the wrong places, but it is more honestand more helpful for scientific progress (and more dignified) if the technical authorscommented on technical works AND DID NOT DISSEMINATE A WRONG PRESENTATION ABOUTMY IDEAS (Fama, Scholes,Engle, etc.) Actually, no: this is VERYdishonest. I will consider it bad faith toattack the statistical statements in my literary work without looking at thetechnical documents and will not spare any shady academic who does so.
The Fourth Quadrant
Where I explain the problems, show how to deal with it(“what to do about the Black Swan”) and provide exhaustive DATA:
Technical version: Errors,Robustness, and the Fourth Quadrant, International Journal of Forecasting, 2010,(in Press)
Literary/philosophical version on Edge.org:
Exposition of my problem tostatisticians: Black Swan and Domains of Statistics, The American Statistician, August 2007,Vol. 61, No. 3
The Gaussian-NonGaussian Problem
Somebad-faith commentators (say like Richard Bookstaberor Eugene Fama) are distorting my idea: TBS is not “against the Gaussian”,but largely the apriorism in the measurement of tailevents and the consequences of errors (see the epistemology papers). The papers below show how the problemis not “Gaussian-NonGaussian” but related theconvergence to the Central Limit Theorem in real time. Domain 1 converges toCLT (fat tails or not), Domain 2 does not (finite variance or not). Fama is still trapped in the 1960s paradigm Gaussian v/sPareto-Levy-Mandelbrot basin; I believe that 1) we do not converge the PLM inreal time (preasymptotics), and 2) we suffer fromsevere inverse problems as we do not observe distributions.
I summarize: the three problems are:
· Pre-asymptotics (all that happens takes place outside the limit),
· InverseProblems(many models can explain the same phenomena), and
· Platonicities (the reduction of the fool)
all thesame illness under different symptoms.
Finiteness of Variance is Irrelevant in the Practiceof Quantitative Finance, my paper in Complexity, 14(2)
Note with Benoit Mandelbrot on Pre-Asymptotics and extreme values of probability distributions, in Mandelbrot, B. and Taleb, N.N. (in Press).Random Jump, not Random Walk. In Francis Diebold and Richard Herring (Eds.), The Known, the Unknown, and the Unknowable,Princeton University Press
Platonic convergence & theCentral Limit Theorem. (technical notes)
Epistemological Problems (The Apriori role in theestimation of small probabilities)
My central problem
The A PrioriProblem of Observed Probabilities, (technical note)
Why probability does not matter, but impact:
Literary discussion on Edge.org: Real Lifeis Not a Casino , forthcoming in Brockman et al, 2009
Inverse problems of probabilities:
I problemi epistemologici del riskmanagement in: Daniele Pace (a cura di)Economia del rischio. Antologia di scritti surischio e decisione economica, Giuffrè, Milano
Risk andEpistemology (with Avital Pilpel) Risk andRegulation (LSE)
On the VeryUnfortunate Problem of Not Observing Probability Distributions (workingpaper, with Avital Pilpel)
Essay in theEpistemology of Power Laws (Wilmott,2005),
Techne-Episteme Problem (Rationalism v/sEmpiricism)
Haug, E.G.and Taleb, N.N. (2008) Why We Have Never Used the Black-Scholes-MertonOption Pricing Formula, Wilmott magazine
10 – Principles : What Needs to Break Should Break Early
Taleb andTapiero, 2009 (forthcoming) – We show why too big is too fragile for the Black Swan.
Psychological Experiments and Discussions
“The Telescope Problem”, Taleb and Goldstein (forthcoming, submitted to Science) – The natural intuitionsare domain dependent.
“Risk and Framing”, Taleb and Goldstein (forthcoming, submitted to Science) – The natural intuitionsare domain dependent.
“Non-neutrality of risk measures” –whya risk measure makes you take MORE risk, regardless of its accuracy.
Goldstein, D.G. and Taleb, N.N. (2007) We Don't Quite Know What We Are Talking About When WeTalk About Volatility, Journalof Portfolio Management, Summer 2007.
Taleb, N.N. (2004) “Bleed or Blowup: What Does Empirical Psychology Tell Us About thePreference For Negative Skewness? ”, Journal ofBehavioral Finance, 5
OptionPricing & True Fat tails
Why Do People Like to Truncate the Upside? Call sellersfool themselves with the illusion of statistical properties (technicalnote)