Friends, I am presenting this document (summary of recent work) explaining what is wrong with economics models at a conference in France (which is not fully infected with the Anglo-American disease).
Please let me know if you find mistakes as I cut/pasted from *Fat Tails & Fragility*.
A Brief Exposition of Violations of Scientific Rigor In Current Economic Modeling
Nassim Nicholas Taleb
This is a brief summary of the problems discussed in philosophical terms in The Black Swan and Antifragile with a more mathematical exposition in Fat Tails and Antifragility (2013). Most of the text was excerpted from the latter book.
Note that this is not a critique of modern economic modeling from outside, but from within, using mathematics to put the methods claimed under scrutiny.
The message is simple: focus on measurable robustness to model error and convex heuristics, instead of relying on “scientific” measurements and models. For these measurements tend to cause blowups. And we can measure fragility, not quite statistical risks.
There are serious differences between predictions, bets, and exposures that have a yes/no type of payoff, the “binaries”, and those that have varying payoffs, which we call the “vanilla”. Real world exposures tend to belong to the vanilla category, and are poorly captured by binaries. Vanilla exposures are sensitive to Black Swan effects, model errors, and prediction problems, while the binaries are largely immune to them. The binaries are mathematically tractable, while the vanilla are much less so. Hedging vanilla exposures with binary bets can be disastrous–and because of the human tendency to engage in attribute substitution when confronted by difficult questions, decision-makers and researchers often confuse the vanilla for the binary.
From Nassim’s Facebook Page:
New paper with Phil Tetlock on the difference between the Thalesian and the Aristotelian: On the Difference between Binary Prediction and True Exposure, With Implications For Forecasting Tournaments and Prediction Markets.
Friends, comments are invited for this draft on a philosophy paper w/ Constantine Sandis, “ETHICS AND ASYMMETRY: SKIN IN THE GAME AS A REQUIRED HEURISTIC FOR ACTING UNDER UNCERTAINTY
C. Sandis & N.N. Taleb
Abstract: We propose a global and mandatory heuristic that anyone involved in an action that can possibly generate harm for others, even probabilistically, should be required to be exposed to some damage, regardless of context. We link the rule to various philosophical approaches to ethics and moral luck.
Link to Paper: http://www.fooledbyrandomness.com/SandisTaleb.pdf
Link to Facebook Discussion: https://www.facebook.com/permalink.php?story_fbid=515541175165176&id=13012333374