Fragility-based vs Evidence-based risk management (Nassim Nicholas Taleb)

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https://www.facebook.com/13012333374/photos/a.10150109720973375.279515.13012333374/10152088137353375/?type=1

Nassim Nicholas Taleb

Evidence is poor risk management. Here is a table strange I didn't think of framing things this way.

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1. More info at his website

http://www.fooledbyrandomness.com/FatTails.html

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5. Thanks. Much appreciated. nt

[Cirque du So-What]

2. I think I'll wait

for the audio book - the one narrated in a George Costanza-like voice.

[Benton D Struckcheon]

3. He's right. He's also an egotistical ass.

Everything he writes is, in fact, the basis of Keynesian economics. Keynes' whole point was that in a panic, uncertainty causes everyone to stop: banks don't lend, investors don't invest, and so on. The classic liquidity trap. Also known by the name of one of his followers: a "Minsky moment". It was covered even earlier, by Walter Bagehot, in his book Lombard Street, and the details of the deflationary dynamic that sets in at times like 2008 were covered by Irving Fisher back in the Depression in The Debt Deflation Theory of Great Depressions.
Taleb's problem is he thinks this invalidates Keynes and that no one has ever thought of this stuff, when in fact it validates Keynesian economics and was thought of by Bagehot, Keynes, Fisher, and Minsky before him, to name just a few. Keynes himself was quite clear in his lifetime that he was NOT dealing with risks that could be captured by probability models, but with the sorts of risks that Taleb calls "fat tails", and which are, simply, panics.

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4. Lottery tickets and long shots

Why do humans ignore the odds? Because improbable events are commonplace.

We humans have a curious relationship with chance. We're prepared to place bets that events with incredibly small probabilities will occur — such as the 1 in 259 million chance that a ticket will win the Mega Millions lottery. Yet, we go about our everyday lives happily ignoring far larger probabilities — that we might get killed by a lightning strike, for example, which has a chance of about 1 in 3 million in the United States each year.

The great mathematician Emile Borel said that sufficiently improbable events never occur. If he were right, then while we shouldn't worry about being killed by lightning, we should certainly never play the Mega Millions lottery.

Of course, Borel didn't mean that such things were actually impossible. What he really meant was that we should regard as impossible any event that had so small a probability that we were unlikely to see it in our lifetimes. Like winning the lottery.

And yet … And yet … People do win lotteries. People do get struck by lightning. And even less probable events do occur, such as the same lottery numbers coming up in consecutive weeks and people winning the lottery twice. (So unfair!) If these events are so improbable that we won't see them in our lifetime, so improbable that we should regard them as impossible, how is it that we see such things happening again and again?

http://www.latimes.com/opinion/commentary/la-oe-adv-hand-improbablility-luck-20140316,0,2434029.story