Statistical Consequences of Fat Tails

Real World Preasymptotics, Epistemology, and Applications

By Nassim Nicholas Taleb

2020

First Published

4.27

Average Rating

446

Number of Pages

13H37M

Audio Length

The book investigates the misapplication of conventional statistical techniques to fat tailed distributions and looks for remedies, when possible. Switching from thin tailed to fat tailed distributions requires more than “changing the color of the dress.” Traditional asymptotics deal mainly with either n=1 or n=∞, and the real world is in between, under the “laws of the medium numbers”–which vary widely across specific distributions. Both the law of large numbers and the generalized central limit mechanisms operate in highly idiosyncratic ways outside the standard Gaussian or Levy-Stable basins of convergence. A few - The sample mean is rarely in line with the population mean, with effect on “naïve empiricism,” but can be sometimes be estimated via parametric methods. - The “empirical distribution” is rarely empirical. - Parameter uncertainty has compounding effects on statistical metrics. - Dimension reduction (principal components) fails. - Inequality estimators (Gini or quantile contributions) are not additive and produce wrong results. - Many “biases” found in psychology become entirely rational under more sophisticated probability distributions. - Most of the failures of financial economics, econometrics, and behavioral economics can be attributed to using the wrong distributions. This book, the first volume of the Technical Incerto, weaves a narrative around published journal articles.

Avg Rating

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Author

Nassim Nicholas Taleb

Author · 13 books

Nassim Nicholas Taleb spent 21 years as a risk taker (quantitative trader) before becoming a flaneur and researcher in philosophical, mathematical and (mostly) practical problems with probability. Taleb is the author of a multivolume essay, the Incerto (The Black Swan, Fooled by Randomness, Antifragile, and Skin in the Game) an investigation of opacity, luck, uncertainty, probability, human error, risk, and decision making when we don’t understand the world, expressed in the form of a personal essay with autobiographical sections, stories, parables, and philosophical, historical, and scientic discussions in nonover lapping volumes that can be accessed in any order. In addition to his trader life, Taleb has also written, as a backup of the Incerto, more than 50 scholarly papers in statistical physics, statistics, philosophy, ethics, economics, international affairs, and quantitative finance, all around the notion of risk and probability. Taleb is currently Distinguished Professor of Risk Engineering at NYU's Tandon School of Engineering (only a quarter time position). His current focus is on the properties of systems that can handle disorder ("antifragile"). Taleb believes that prizes, honorary degrees, awards, and ceremonialism debase knowledge by turning it into a spectator sport. See Wikipedia for more details.