International Monetary Fund, Sept 16, 2010, Washington, DC, General Lecture (morning) and Technical Workshop (afternoon) on how to detect tail-fragility.

Really hoping there are audio/video files of NNT’s presentations for the rest of us.

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

nntaleb: The Magnificent, Note 133, www.fooledbyrandomness.com/notebook.htm

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

nntaleb: The Bed of Procrustes: Philosophical & Practical Aphorisms", N N Taleb (of Amioun), c. Jan 2011 www.fooledbyrandomness.com/aphorisms.pdf

At this point I think it would be helpful to illuminate what I’ve been doing both in reaction to the economic data and to be proactive to what I think is still to come.As you may have read already on my Portfolio page, I do employ black swan protection protocols rather consistently month to month.What this means is, each month I purchase the following months’ put options on the SPY (the underlying investment symbol for the S&P500 stock index).These put options, which reflect a bearish outlook on the underlying investment, are bought “out of the money,” meaning the anticipated price (or strike price) that I’m purchasing is below the actual price of SPY as it stands today.So for example, SPY closed around 107 today, and my September puts have a strike price of 100.If the SPY were to make a sharp move downward below 100 before September 18 (the day my options expire), I would profit handsomely.If the puts expire out of the money I’ll lose my entire initial investment sum.

HatTip to Dave Lull

Nassim Nicholas Taleb is the author of The Black Swan. He is at work on a paper called “Why Did the Crisis of 2008 Happen?” (Links to NNT pdf)

“The captain goes down with the ship…”

Time to realize that capitalism is not about free options. The captain goes down with the ship — all captains and all ships — making everyone involved in risk-bearing accountable, no exception, none. Morally, legally, whatever can be done. That includes the Nobel (Bank of Sweden), the academic establishment, the rating agencies, forecasters, bank managers, etc.

It’s true Nassim Taleb (author of “The Black Swan”) recommends a “barbell” approach for most investors when allocating their capital. What this equates to is putting 80-90% of your funds into very conservative instruments, such as cash, and the other 10-20% into very high risk instruments like options, where payoffs are significant if your options come into the money. This way, you’re insulated against catastrophic loss but positioned to strike it big if your options hit. (Options have the potential for cubic payoffs, a concept I’ll examine in greater detail in future posts.)

But the commenter brings up a good point – what about inflation?

nntaleb: @felixsalmon sees with clarity: http://blogs.reuters.com/felix-salmon/2010/08/16/the-mess-that-is-deposit-insurance/

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JohnH-  Excerpt from the article:

The product in question is CDARS, and Blinder is a founder of the company which invented them. When Blinder wrote an op-ed complaining about an attempt to broaden deposit insurance, I was underwhelmed, writing that “Blinder has a massive conflict: he’s the vice-chairman of the company which runs CDARS, a financial instrument designed solely to get around FDIC deposit limits.” Without deposit limits, of course, CDARS become moot, and Blinder loses a large chunk of income.