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

Daniel G. Goldstein

Microsoft Research New York City; London Business School

Nassim Nicholas Taleb

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

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

Daniel G. Goldstein (Contact Author)

Microsoft Research New York City ( email )

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HOME PAGE: http://www.dangoldstein.com

Nassim Nicholas Taleb

NYU-Tandon School of Engineering ( email )

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United States

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