Nassim Nicholas Taleb, author of the widely discussed The Black Swan and Fooled By Randomness, is out with a new paper. “The Fourth Quadrant: A Map of the Limits of Statistics”pursues
a thesis very familiar to his readers, namely that economistsand
finance professionals put society at risk by offering false comfortin
the form of statistical models.
Risk Does Not Equal Volatility
The
novel effort here is Taleb’s attempt to map out which kinds ofrisks and
events are more-or-less adequately captured by statistics,and which
ones fall into the unquantifiable “black swan” category.Events that
fall into this unanalyzable fourth quadrant (see imagebelow) are
characterized first by what logicians would call
multivalenttruth-conditions: they are not all-or-nothing, true or
falseoccurrences, but rather may have varying degrees of
realization.Second, the “payoffs” or impacts of such events may be
nonlinear.
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