Monthly Archives: October 2012

Mathematical Definition, Mapping, and Detection of AntiFragility by Nassim Taleb, Raphael Douady :: SSRN

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Abstract: We provide a mathematical definition of fragility and antifragility as negative or positive sensitivity to a semi-measure of dispersion and volatility a variant of negative or positive “vega” and examine the link to nonlinear effects. We integrate model error and biases into the fragile or antifragile context. Unlike risk, which is linked to psychological notions such as subjective preferences (hence cannot apply to a coffee cup we offer a measure that is universal and concerns any object that has a probability distribution whether such distribution is known or, critically, unknown).

We propose a detection of fragility, robustness, and antifragility using a single “fast-and-frugal”, model-free, probability free heuristic that also picks up exposure to model error. The heuristic lends itself to immediate implementation, and uncovers hidden risks related to company size, forecasting problems, and bank tail exposures it explains the forecasting biases. While simple to implement, it outperforms stress testing and other such methods such as Value-at-Risk.

via Mathematical Definition, Mapping, and Detection of AntiFragility by Nassim Taleb, Raphael Douady :: SSRN.

Looks like a preview of what to expect…

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Looks like a preview of what to expect from the economics and econophaster establishment. Davies is the gentleman there; others have not even given a simple thougth to model error and which domains are affected by it. But asking people to explain insults can lead to pleasant surprises.

http://blogs.reuters.com/felix-salmon/2012/10/19/when-taleb-met-davies/

When Taleb met Davies
blogs.reuters.com
This morning, Nassim Taleb returned to Twitter, posting one of the technical appendices to his new book. And immediately he got into a wonderfully wonky twitterfight/conversation with Daniel Davies.

via Looks like a… | Facebook.

NASSIM TALEB: Here’s Why Governments Always Miss Their Own Budget Deficit Targets – Business Insider

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The pdf is actually called Econfragilize

(The book isn’t actually out until late November, but Taleb posted this appendix, entitled WHERE MOST ECONOMIC MODELS FRAGILIZE AND BLOW PEOPLE UP, on his website today.)

The problem is that the economic data forecasts the government uses to plan its budget around – like where unemployment will be a year from now, for example – are pretty much taken as a given, instead of looked at as mere likelihoods with some given probability.

When the government plans its budget this way, it tends to underestimate the damage when things get worse than they initially expected.

Taleb illustrates how this mistake causes governments to continually underestimate the size of their budget deficits and miss their targets:

Say a government estimates unemployment for the next three years as averaging 9 percent; it uses its econometric models to issue a forecast balance B of a two-hundred-billion deficit in the local currency. But it misses (like almost everything in economics) that unemployment is a stochastic variable. Employment over a three-year period has fluctuated by 1 percent on average. We can calculate the effect of the error with the following:

Unemployment at 8%, Balance B(8%) = −75 bn (improvement of 125 bn)

Unemployment at 9%, Balance B(9%)= −200 bn

Unemployment at 10%, Balance B(10%)= −550 bn (worsening of 350 bn)

The concavity bias, or negative convexity bias, from underestimation of the deficit is −112.5 bn, since ½ {B(8%) + B(10%)} = −312 bn, not −200 bn.

In this example, Taleb identified that since unemployment typically varies around 1 percent, one should take estimates of what happens when it goes 1 percent lower than expected and when it goes 1 percent higher than expected.

via NASSIM TALEB: Here’s Why Governments Always Miss Their Own Budget Deficit Targets – Business Insider.