Errors, robustness, and the fourth quadrant. Taleb, N. N. International Journal of Forecasting, 25(4):744--759, Elsevier B.V., 2009. abstract bibtex The paper presents evidence that econometric techniques based on variance-L2 norm-are flawed and do not replicate. The result is un-computability of the 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 (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. ?? 2009 International Institute of Forecasters.
@article{Taleb2009a,
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 the 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 (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. ?? 2009 International Institute of Forecasters.},
author = {Taleb, Nassim Nicholas},
file = {:Users/hykel/Documents/library/Taleb/Taleb - 2009 - Errors, robustness, and the fourth quadrant.pdf:pdf},
isbn = {0169-2070},
journal = {International Journal of Forecasting},
keywords = {Complexity,Decision theory,Fat tails,Risk management},
number = {4},
pages = {744--759},
publisher = {Elsevier B.V.},
title = {{Errors, robustness, and the fourth quadrant}},
volume = {25},
year = {2009}
}
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