Silent Risk: Lectures on Fat Tails, (Anti)Fragility, Precaution, and Asymmetric Exposures

Nassim Nicholas Taleb

New York University-Poly School of Engineering

July 23, 2014

The full-length book provides a mathematical framework for decision making and the analysis of (consequential) hidden risks, those tail events undetected or improperly detected by statistical machinery; and substitutes fragility as a more reliable measure of exposure. Model error is mapped as risk, even tail risk.

Risks are seen in tail events rather than in the variations; this necessarily links them mathematically to an asymmetric response to intensity of shocks, convex or concave.

The difference between "models" and "the real world" ecologies lies largely in an additional layer of uncertainty that typically (because of the same asymmetric response by small probabilities to additional uncertainty) thickens the tails and invalidates all probabilistic tail risk measurements - models, by their very nature of reduction, are vulnerable to a chronic underestimation of the tails.

So tail events are not measurable; but the good news is that exposure to tail events is. In "Fat Tail Domains" (Extremistan), tail events are rarely present in past data: their statistical presence appears too late, and time series analysis is similar to sending troops after the battle. Hence the concept of fragility is introduced: is one vulnerable (i.e., asymmetric) to model error or model perturbation (seen as an additional layer of uncertainty)?

Part I looks at the consequences of fat tails, mostly in the form of slowness of convergence of measurements under the law of large number: some claims require 400 times more data than thought. Shows that much of the statistical techniques used in social sciences are either inconsistent or incompatible with probability theory. It also explores some errors in the social science literature about moments (confusion between probability and first moment, etc.)

Part II proposes a more realistic approach to risk measurement: fragility as nonlinear (concave) response, and explores nonlinearities and their statistical consequences. Risk management would consist in building structures that are not negatively asymmetric, that is both "robust" to both model error and tail events. Antifragility is a convex response to perturbations of a certain class of variables.

Number of Pages in PDF File: 292

Keywords: Risk Management, Probability Theory

working papers series

Download This Paper

Date posted: February 8, 2014  

Suggested Citation

Taleb, Nassim Nicholas, Silent Risk: Lectures on Fat Tails, (Anti)Fragility, Precaution, and Asymmetric Exposures (July 23, 2014). Available at SSRN: http://ssrn.com/abstract= or http://dx.doi.org/10.2139/ssrn.2392310

Contact Information

Nassim Nicholas Taleb (Contact Author)
New York University-Poly School of Engineering ( email )
Brooklyn, NY 11201
United States

Feedback to SSRN

Paper statistics
Abstract Views: 11,080
Downloads: 4,880
Download Rank: 31,882

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.281 seconds