New Taleb on error’s errors:

The Future Has Thicker Tails than the Past: Model Error as Branching CounterfactualsNassim Nicholas Taleb

NYU-Poly

May 23, 2011

Abstract:Ex ante predicted outcomes should be interpreted as counterfactuals (potential histories), with errors as the spread between outcomes. But error rates have error rates. We reapply measurements of uncertainty about the estimation errors of the estimation errors of an estimation treated as branching counterfactuals. Such recursions of epistemic uncertainty have markedly different distributial properties from conventional sampling error, and lead to fatter tails in the projections than in past realizations. Counterfactuals of error rates always lead to fat tails, regardless of the probability distribution used. A mere .01% branching error rate about the STD (itself an error rate), and .01% branching error rate about that error rate, etc. (recursing all the way) results in explosive (and infinite) moments higher than 1. Missing any degree of regress leads to the underestimation of small probabilities and concave payoffs (a standard example of which is Fukushima). The paper states the conditions under which higher order rates of uncertainty (expressed in spreads of counterfactuals) alters the shapes the of final distribution and shows which a priori beliefs about conterfactuals are needed to accept the reliability of conventional probabilistic methods (thin tails or mildly fat tails).

I read both of Taleb's books and think I understood them reasonably well. I however cannot understand this abstract. Either Taleb isn't articulating it very well, or I'm just not as smart as I thought. I can't believe this phrase, for instance, can't be improved for the sake of clarity: "measurements of uncertainty about the estimation errors of the estimation errors of an estimation"

Simplify it as “errors have errors”, and those errors have adistribution, but it requires thinking through counterfactuals tounderstand them.Having said, this is an academic paper, so opacity goes with the territory.

Thanks, that helps.

Someone should do a study comparing the intellectual insecurity of academic culture to the Macho Man syndrome of Hummer drivers: Insufferably opaque jargon compensates for a small brain as a multi-ton gas-guzzling road hog compensates for [fill in the blank]).

quick searches:

– sci.stat.math nobody seemed to have anything bad to say about Taleb

– nuclearphynance & Wilmott: Taleb is overrated. Has some okay things to say but nothing earth-shattering. Personality and self-promotion seem to put most of them off. A couple found his material worthwhile.

Didn't see anything re this paper.

Neat idea to me, but I'm not a researcher in the field.

…I'm still bothered by the Monty Hall problem that was mentioned here a while back (thanks). must navel gaze.

re academic-speak – isn't that pretty well any abstract? They're all like that AFAIK