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Mapping Payoffs (pdf)

This is a mathematical-legal attempt at formally mapping payoffs and assessing their memberships in precisely defined classes. By legal we mean as expressed explicitly in a codified term sheet, legal contract, or formal legal code, which naturally converge to the mathematical definitions. The aims is showing the impossibility of verbalistic discussion of risk and exposures and the corresponding biases, and shows how the gap in stochastic properties between the verbalistic and mathematical increases under fat tails. Many biases in the psychology-decision science literature (such as the overestimation of tail events, or the long shot bias in fat-tailed domains) are shown to simply result from misdefinitions or sloppy verbalism.

via MappingPayoffs.pdf.

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