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Errors in the Interpretation of the Black Swan philosophy

November 4th, 2009 | Add a Comment

Summary of the problem discussed in The Black Swan (and associated papers): The problem, basically 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 huge role, manifested by the disproportionate role of seven single observation, event, or element, in the aggregate properties). I hold that this is a severe and consequential statistical and epistemological problem as they 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 they 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 they 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.Key Mistakes Made While Interpreting Black Swans (excerpted by SSRN):1. It is not about the Gaussian distribution2. There’s no such thing as a historical event in the probabilistic sense3. Folk Psychology, & Philosophy of Probability4. The problem of induction, causation, and complexityClick Here To Read Nassim Taleb’s Latest On Errors in the Interpretation of The Black Swan
Summary of the problem discussed in The Black Swan (and associated papers): The problem, basically 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 huge role, manifested by the disproportionate role of seven single observation, event, or element, in the aggregate properties). I hold that this is a severe and consequential statistical and epistemological problem as they 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.
The point of The Black Swan is that both empirical knowledge (i.e. extrapolating statistics) and a priori theories fail in the tails and it is vital to “robustify” against it using the concepts of “the fourth quadrant”. The point has been garbled by members of the economics establishment that claim mistakenly “we know that” and “we know about fat tails” or “power laws”. This is both wrong and not my point. The paper presents corrections to the misperceptions.
A more compact summary: theories fail most in the tails; some domains are more vulnerable to tail events.
Furthermore, to be more aggressive, while limits like those attributed to Gödel bear massive philosophical consequences, but they 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 they 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).

BlackSwanBK“Summary of the problem discussed in The Black Swan (and associated papers): The problem, basically 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 huge role, manifested by the disproportionate role of seven single observation, event, or element, in the aggregate properties). I hold that this is a severe and consequential statistical and epistemological problem as they 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.

The point of The Black Swan is that both empirical knowledge (i.e. extrapolating statistics) and a priori theories fail in the tails and it is vital to “robustify” against it using the concepts of “the fourth quadrant”. The point has been garbled by members of the economics establishment that claim mistakenly “we know that” and “we know about fat tails” or “power laws”. This is both wrong and not my point. The paper presents corrections to the misperceptions.”

(Excerpt Common Errors in the Interpretation of the Ideas of The Black Swan and Associated Papers by Nassim Nicholas Taleb; source SSRN)

A more compact summary: theories fail most in the tails; some domains are more vulnerable to tail events.

Furthermore, to be more aggressive, while limits like those attributed to Gödel bear massive philosophical consequences, but they 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 they 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).

tower-of-babelKey Mistakes Made While Interpreting Black Swans (excerpted via SSRN):

1. It is not quite about the Gaussian distribution

2. There’s no such thing as a historical event in the probabilistic sense

3.  Folk Psychology, & Philosophy of Probability

4. The problem of induction, causation, and complexity

For those who want to read the article I’ve been so kind to provide it here through Scribd. The original source is SSRN.

Nassim Taleb: On Errors in the Interpretation of  The Black Swan

SSRN-id1490769

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