We Don't Quite Know What We are Talking About When We Talk About Volatility
8 Pages
Posted: 14 Mar 2007
Last revised: 16 Nov 2012
Microsoft Research New York City; London Business School
NYU-Tandon School of Engineering
Date Written: March 28, 2007
Abstract
Finance professionals, who are regularly exposed to notions of volatility, seem to confuse mean absolute deviation with standard deviation, causing an underestimation of 25% with theoretical Gaussian variables. In some fat tailed markets the underestimation can be up to 90%. The mental substitution of the two measures is consequential for decision making and the perception of market variability.
Keywords: finance, volatility, risk, intuition, statistics, metrics
JEL Classification: D8, D9, E2, G2, N2
Suggested Citation:
Suggested Citation
Goldstein, Daniel G. and Taleb, Nassim Nicholas, We Don't Quite Know What We are Talking About When We Talk About Volatility (March 28, 2007). Journal of Portfolio Management, Vol. 33, No. 4, 2007. Available at SSRN: https://ssrn.com/abstract=970480
