Risk Neutral Option Pricing Without Dynamic Hedging, A Measure-Theoretic Proof

[facebookpost https://www.facebook.com/permalink.php?story_fbid=10152111753388375&id=13012333374]

 

Abstract: Proof that under constraints of Put-Call Parity, the probability measure for the valuation of a European option is risk neutral under any general probability distribution, bypassing the Black-Scholes-Merton dynamic hedging argument, and without the requirement of complete markets. The heuristics used by traders for centuries are both more robust and more rigorous than held in the economics literature.

http:// www. fooled by randomness. com/ Option Pricing. pdf

SSRN: Constantine Sandis & Nassim Nicholas Taleb – The Skin In The Game Heuristic for Protection Against Tail Events

The Skin In The Game Heuristic for Protection Against Tail Events

Constantine Sandis
Oxford Brooks

Nassim Nicholas Taleb
NYU-Poly; Université Paris I Panthéon-Sorbonne – Centre d’Economie de la Sorbonne (CES)

July 30, 2013

Abstract:
Standard economic theory makes an allowance for the agency problem, but not the compounding of moral hazard in the presence of informational opacity, particularly in what concerns high-impact events in fat tailed domains. But the ancients did; so did many aspects of moral philosophy. We propose a global and morally mandatory heuristic that anyone involved in an action which can possibly generate harm for others, even probabilistically, should be required to be exposed to some damage, regardless of context. While perhaps not sufficient, the heuristic is certainly necessary hence mandatory. It is supposed to counter risk hiding and transfer in the tails. We link the rule to various philosophical approaches to ethics and moral luck.

http:// papers. ssrn. com/ sol3/ papers.cfm? abstract_id=2298292

Life is Randomness! Life is Antifragility!

From Nassim Taleb’s Facebook Page:

Life is Randomness! Life is Antifragility!

More evidence that you are alive if & only if you like volatility. More evidence of Jensen’s inequality (convex response). This article passed my filter, my bi-monthly linking allowance. (via Steven Stogatz)

Stochastic properties of neurotransmitter release expand the dynamic range of synapses.

Yang H, Xu-Friedman MA.
Department of Biological Sciences, University at Buffalo, State University of New York, Buffalo, New York 14260.

Release of neurotransmitter is an inherently random process, which could degrade the reliability of postsynaptic spiking, even at relatively large synapses. This is particularly important at auditory synapses, where the rate and precise timing of spikes carry information about sounds. However, the functional consequences of the stochastic properties of release are unknown. We addressed this issue at the mouse endbulb of Held synapse, which is formed by auditory nerve fibers onto bushy cells (BCs) in the anteroventral cochlear nucleus. We used voltage clamp to characterize synaptic variability. Dynamic clamp was used to compare BC spiking with stochastic or deterministic synaptic input. The stochastic component increased the responsiveness of the BC to conductances that were on average subthreshold, thereby increasing the dynamic range of the synapse. This had the benefit that BCs relayed auditory nerve activity even when synapses showed significant depression during rapid activity. However, the precision of spike timing decreased with stochastic conductances, suggesting a trade-off between encoding information in spike timing versus probability. These effects were confirmed in fiber stimulation experiments, indicating that they are physiologically relevant, and that synaptic randomness, dynamic range, and jitter are causally related.

http://www.ncbi.nlm.nih.gov/pubmed/24005293

Paper: Problem with Economics

From Nassim Nicholas Taleb Facebook Page:

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*.

https:// dl. drop box user content. com/ u/ 50282823/ Problems%20 with%20 Economics.pdf

A Brief Exposition of Violations of Scientific Rigor In Current Economic Modeling

Nassim Nicholas Taleb
NYU-Poly Institute

July 2013

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.

New Nassim Taleb paper with Phil Tetlock on SSRN: On the Difference between Binary Prediction and True Exposure, with Implications for Forecasting Tournaments and Prediction Markets

ssrn-logoTaleb, Nassim Nicholas and Tetlock, Philip E., On the Difference between Binary Prediction and True Exposure, with Implications for Forecasting Tournaments and Prediction Markets (June 25, 2013). Available at SSRN: http:// papers. ssrn. com/ sol3/ papers.cfm? abstract_id= 2284964

Abstract:
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.

Link to paper (PDF): http:// papers. ssrn. com/ sol3/ Delivery. cfm/ SSRN_ID2284964_code475810.pdf? abstractid=2284964&mirid=1

ETHICS AND ASYMMETRY: SKIN IN THE GAME AS A REQUIRED HEURISTIC FOR ACTING UNDER UNCERTAINTY

From Nassim Taleb’s Facebook Page:

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.

http://www. fooled by randomness.com/ Sandis Taleb. pdf

Link to Paper: http://www. fooled by randomness. com/ SandisTaleb.pdf
Link to Facebook Discussion: https://www. facebook. com/ permalink.php? story_fbid= 515541175165176&id=13012333374