THE PROBLEM OF FORECASTING

Nassim Nicholas Taleb(Cypriot name: Nikos Philologos)

Tandon School, NYU

RetirementOrigin

Retirement

Expert Problem

8

BINARY VS VANILLA

Thin tails

Fat Tails

5 10 15Exit Time

0.1

0.2

0.3

0.4

0.5

0.6

Probability

FAT TAILS

Reasoning Errors: It is not changing the color of the dress

4 5 6 7 8 9 10Deviation(σ)

1×1032

2×1032

3×1032

4×1032

5×1032

6×1032

Ratio ofS[K]2

S[2 K]

Extremistan

The catastrophe principle: for the class of subexponential distributions, ruin is more likely to come from a single extreme event than a series of bad episodes

Law of Large Numbers

Convergence (temporal & cross sectional)

20 40 60 80 100n

1

2

3

4

MAD

PAYOFFS

ConflationProblem

Benefits fromDecline

SeriousHarm fromDecline

StartingPoint

20 40 60 80 100 120

-60

-40

-20

20

80 100 120 140x

-10

-5

5

10

Payoff

-10 -5 5 10

2

4

6

8

Absence of Evidence…

Reasoning and Fat Tailedness

ELECTIONS

Social Science Statistical Toolkit