Were you fooled by Nassim Nicholas Taleb’s randomness?
Was the Black Swan too dark for your comprehension?
Was the fourth quadrant off your radar screen?
Never fear, for the Black Swan man himself has penned a paper outlining his rare event-theory idea and “common errors” in interpreting it:
Summary of the problem discussed in The Black Swan (and associated papers): The problem, simply stated (which I have had to repeat continuously) is about the degradation of knowledge when it comes to rare events (”tail events”), with serious consequences in some domains I call “Extremistan” (where these events play a large role, manifested by the disproportionate role of one single observation, event, or element, in the aggregate properties). I hold that this is a severe and consequential statistical and epistemological problem as we cannot assess the degree of knowledge that allows us to gauge the severity of the estimation errors. Alas, nobody has examined this problem in the history of thought, let alone try to start classifying decision-making and robustness under various types of ignorance and the setting of boundaries of statistical and empirical knowledge.
Furthermore, to be more aggressive, while limits like those attributed to Gödel bear massive philosophical consequences, but we can’t do much about them, I believe that the limits to empirical and statistical knowledge I have shown have both practical (if not vital) importance and we can do a lot with them in terms of solutions, with the “fourth quadrant approach”, by ranking decisions based on the severity of the potential estimation error of the pair probability times consequence (Taleb, 2009; Makridakis and Taleb, 2009; Blyth, 2010, this issue).
A more compact summary: theories fail most in the tails; some domains are more vulnerable to tail events.
You can read the whole patronising and egotistical thing here.
Here though, is a taster of the kind of “errors” Taleb is railing against:
Alas, the deeper points of The Black Swan that were exiled in the compressed technical material in the Notes section in the back of the volume seem to have been chronically ignored, which has pushed me to rephrase them in a more traditional form in a dozen of scholarly papers, in a variety of disciplines. So, while I thank the contributors for their time and interest, I will try to do something more useful than provide a tit-for-tat direct answer to some of the “criticism” by Callahan and Jervis1, largely because, with due respect, I do not find their condescending outbursts interesting enough to be worth commenting upon, and also because the papers by Blyth and Runde do so in no small part. Statements like “we political scientists know all of this Black Swan” business rings as hollows as the “we economists know this very well” particularly in front of the economic crisis that started in 2008 –much on that point, later. They just don’t see my problem of degradation of knowledge in proportion to the decrease of its probabilities. The only irrefutable statement I’ve seen in the criticism is that the work is “popular”, reflecting an interesting elementary error in reasoning in holding that popular implies non-scholarly: if all non-rigorous, non-scholarly writings aim to be popular, all scholarly writings do not have to be non-popular. Instead I will proceed to providing a correction of common general mistakes made in the interpretation of the ideas of the book for future readers to not fall in the trap.
. . . Many readers who have too much baggage (or perhaps not enough) tend, when reading for “work” or for the purpose of establishing their status (say, to write a review), rather than to satisfy a genuine curiosity, to read quickly and efficiently, scanning jargon terms and rapidly making associations with some pre-packaged ideas. This results in the squeezing of the ideas exposed in The Black Swan into some commoditized well know framework, as if I partook of the off-the-shelf-re-warmed-ideas-withsome- new-wrinkle traditions that give a bad name to academia, or as if my positions could be squeezed into: standard skepticism, empiricism, essentialism, pragmatism, Popperian falsificationism, Knightian uncertainty, behavioral economics, chaos theory, etc.
Still with us?
If you are keen to avoid the egregious mistakes highlighted by Taleb then by all means read the whole thing.
For a quick primer though — just keep in mind the following: FIRST COMMON MISTAKE: IT IS NOT QUITE “ABOUT THE GAUSSIAN DISTRIBUTION” SECOND COMMON MISTAKE: THERE IS NO SUCH THING AS AN HISTORICAL “EVENT” IN THE PROBABILISTIC SENSE THIRD COMMON MISTAKE: THE BLACK SWAN, FOLK PSYCHOLOGY, AND THE PHILOSOPHY OF PROBABILITY FOURTH COMMON MISTAKE: THE PROBLEM OF INDUCTION, CAUSATION, AND COMPLEXITY Any objectors will no doubt be pecked to death by a bevy of angry black swans.
(H/T Falkenblog).
Related links: The Black Swan battle is about to begin - FT Alphaville Battle of the financial pundits - FT Alphaville Dragon-king of the outlier events - FT Alphaville
Read Full Article »