Monthly Archives: February 2014

It is easy for others, but not for you…

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It is easy for others, but not for you, to detect the asymmetry between what you gain and what you give by doing, writing or saying.

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COMMENT ON THE ASYMMETRY: The most convincing statements are those in which you stand to lose (maximal skin in the game); the most unconvincing ones are those in which you patently (but unknowingly) try to enhance your status without contribution (like the great majority of academic papers that say nothing and take no risks); but it doesn’t have to be that way. As long as the substance and gain for others exceeds the showoff content, you are OK. Stay human, take as much as you can, under the condition you give more than you take.

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EARLIER APHORISM: Anything people do, write, or say to enhance their status or distinction shows like a mark on their foreheads, more visible to others than it is to them.

(modified)

via It is easy for others, but not for you, to… – Nassim Nicholas Taleb.

Daniel Kahneman changed the way we think about thinking. But what do other thinkers think of him? | Science | The Observer

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The first idea Danny gave me in Rome is that people do not perceive stand-alone objects, rather differences away from an anchor point. He said that it was not cultural: even the vision of babies was based on identifying variations. It was simply more economical for the brain to do so. Investors are more affected by changes in wealth than by wealth itself and they are very sensitive to the way information is presented to them; they are more unhappy if one tells them they have lost $10,000 (the variation) than if one informs them that their wealth is now $480,000 (the total). They just take a benchmark and react to variations from it. So one could make them react more rationally by modifying the anchor.

That small point was miraculous: upon my return to New York I forced the clients to write off the amount they were willing to lose during the year (like an insurance premium expensed at the beginning of the period). I then posted performance reports showing how much they “recovered”, ie, money not lost. It was a wonder pill: clients became excited as they treated the money not lost as if it were a profit.

The second – equally potent – point I learned is that people do not aggregate information properly. When the portfolio is composed of many trades, and the net performance is positive, though some trades were up while a few were down, the clients got excited when they only saw the net total, but not when they saw the details. A small loss in a trade more than compensated by gains elsewhere would turn them off, and cause them to interrupt my lunch for an urgent conversation.

I also learned that one can change people’s anchor to force them to have a realistic outlook on things. I am Lebanese and people keep bemoaning the relatively small tension in the wake of the Syrian civil war. But when I tell my mother to think of the turmoil that did not happen, her mood changes instantly.

via Daniel Kahneman changed the way we think about thinking. But what do other thinkers think of him? | Science | The Observer.

Silent Risk: Lectures on Fat Tails, (Anti)Fragility, and Asymmetric Exposures by Nassim Nicholas Taleb :: SSRN

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Abstract:

The full-length book provides a mathematical framework for decision making and the analysis of (consequential) hidden risks, those tail events undetected or improperly detected by statistical machinery; and substitutes fragility as a more reliable measure of exposure. Model error is mapped as risk, even tail risk.

Risks are seen in tail events rather than in the variations; this necessarily links them mathematically to an asymmetric response to intensity of shocks, convex or concave.

The difference between “models” and “the real world” ecologies lies largely in an additional layer of uncertainty that typically (because of the same asymmetric response by small probabilities to additional uncertainty) thickens the tails and invalidates all probabilistic tail risk measurements – models, by their very nature of reduction, are vulnerable to a chronic underestimation of the tails.

So tail events are not measurable; but the good news is that exposure to tail events is. In “Fat Tail Domains” (Extremistan), tail events are rarely present in past data: their statistical presence appears too late, and time series analysis is similar to sending troops after the battle. Hence the concept of fragility is introduced: is one vulnerable (i.e., asymmetric) to model error or model perturbation (seen as an additional layer of uncertainty)?

Part I looks at the consequences of fat tails, mostly in the form of slowness of convergence of measurements under the law of large number: some claims require 400 times more data than thought. Shows that much of the statistical techniques used in social sciences are either inconsistent or incompatible with probability theory. It also explores some errors in the social science literature about moments (confusion between probability and first moment, etc.)

Part II proposes a more realistic approach to risk measurement: fragility as nonlinear (concave) response, and explores nonlinearities and their statistical consequences. Risk management would consist in building structures that are not negatively asymmetric, that is both “robust” to both model error and tail events. Antifragility is a convex response to perturbations of a certain class of variables.

Number of Pages in PDF File: 296

Keywords: Risk Management, Probability Theory

via Silent Risk: Lectures on Fat Tails, (Anti)Fragility, and Asymmetric Exposures by Nassim Nicholas Taleb :: SSRN.

OPEN YOUR OWN STORE

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OPEN YOUR OWN STORE

When (…) Lebanese entrepreneur Alex Massad— described by Fortune as one of America’s toughest businessmen— first accepted a position with Mobil Oil, Massad’s mother lamented, “[ W] hy don’t you go into business for yourself? Why don’t you open a store?” But Massad stayed on, rising quickly to become one of Mobil’s top executives. Finally, on one visit home, Alex . . . announced triumphantly, “Mama, I have bought a store.” Her elderly face brightened at the news. At last! Alex had taken her advice; her son would finally be judged a success in her community. . . . “I bought Montgomery Ward!” Her smile changed to a disappointed frown. She was unimpressed and said, with despair, “It’s not the same thing. I meant your own store!”

In Chua, Amy & Rubenfeld, Jed, 2014 . The Triple Package: How Three Unlikely Traits Explain the Rise and Fall of Cultural Groups in America.

via OPEN YOUR OWN STORE When (…) Lebanese… – Nassim Nicholas Taleb.