Errors, Robustness, and The Fourth Quadrant
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Date: 04-23-2009
Start Time:
5:30pm
End Time: 7:00pm
Speaker: Nassim Taleb, New York University-Polytechnic Institute and Universa Investments
Location: Park Avenue Plaza at 55 East 52nd Street
ABSTRACT
The paper presents evidence that econometric techniques based on variance-L2 norm are flawed –and do not replicate. The result is un-computability of role of tail events. The paper proposes a methodology to calibrate decisions to the degree (and computability) of forecast error. It classifies decision payoffs in two types: simple payoffs (true/false or binary) and complex (higher moments); and randomness into type-1 (thin tails) and type-2 (true fat tails) and shows the errors for the estimation of small probability payoffs for type 2 randomness. The Fourth Quadrant is where payoffs are complex with type-2 randomness. We propose solutions to mitigate the effect of the Fourth Quadrant based on the nature of complex systems.
BIO
Nassim Taleb is Distinguished Professor of Risk Engineering at NYU-Poly and principal, Universa Investments LP.
*There will be a cocktail following the event.
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