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SOME STATISTICAL
RIGOR
Main Problem
uTypical Response: Nothing new, we know
20
40
60
80
100
Inequality Measures
u Under
EVT
become thin,
even under
finite variance
Central limit
never reaches
asymptote
Pareto 80/20
For a negatively (positively)
skewed distribution > 93% of
observations fall above
(below) the mean.
Unseen rare events
-140
-120
-100
-80
-60
-40
-20
Outcomes
%>(<)mean
1.00
0.95
0.90
0.85
0.80
0.75
1.5
2.0
2.5
3.0
The left graph shows hormesis for an organism (similar to Figure 19): we
can see a stage of benefits as the dose increases (initially convex) slowing down into
a phase of harm as we increase the dose a bit further (initially concave); then we see
things flattening out at the level of maximum harm (beyond a certain point, the organism is dead so there is such a thing as a bounded and known worst case scenario
in biology). To the right, a wrong graph of hormesis in medical textbooks showing
initial concavity, with a beginning that looks linear or slightly concave.
FIGURE 34.
Asymmetry
Probability
Probability
Unseen
events
Unseen
rarerare
events
Unseen
rare events
FIGURE 35.
40
60
80
100
120
140
Outcomes
Outcomes
80
60
60
40
40
20
20
Outc Outcomes
Outcomes
4) Difference
betweenskewed
sample
mean
likeWhen
you look at a positively
(antifragile)
timeand
series maximum
and make inferences
about themean:
unseen, you
the good
stuff and underestimate
benefits
(the Pisano,
lihood
: miss
Table
I shows
the true the
mean
using
the
2006a, 2006b, mistake). On the right, the other Harvard problem, that of Froot
parametrization
ofcorresponds
the Pareto
distribution
above
inverting
(2001). The filled area
to what
we do not tend
to seeand
in small
samples,
insufficiency of points.
Interestingly
the shaded
area increases
with or
model
error.
thefrom
transformation
back
to compact
support.
"True"
maxiThe more technical sections call this zone (turkey) and (inverse turkey).
mum likelihood, or "statistical" mean is between 3 and 4 times
observed
mean.
DIFFERENCE
BETWEEN POINT ESTIMATES AND DISTRIBUTIONS
This means the "journalistic" observation of the mean, aside
Let us apply this analysis to how planners make the mistakes they make, and why
deficits
tend
to be worse than
planned:of relying on sample mean, unfrom
the
conceptual
mistake
derestimates the true mean by at least 3 times and higher future
observations would not allow the conlusion that violence has
"risen".
B
Data
Raw Data
Naive Rescaling
Log-rescaling
SHADOW MEAN
TABLE I
L
Sample Mean
10K
9.079 106
25K
9.82 106
Tale_9781400067824_3p_all_r1.indd 444
50K
1.12 107
100K
1.34 107
200K
1.66 107
500K
2.48 107
ML Mean
3.11 107
3.62 107
4.11 107
4.74 107
6.31 107
8.26 107
Ratio
3.43
3.69
3.67
3.53
3.79
3.31
B. Conclusion
History as seen from tail analysis is far more risky, and conflicts far more violent than acknowledged by naive observation
III. M ET
A. Rescaling method
We remove the c
laws as follows (see
for number of incide
a naive rescaling of
population at period
of Ht .
Next, with today
naively rescaled mi
introduce a smooth
satisfying:
10/10/12 8:44 AM
17
0.010
0.015
0.020
0.025
M@tD
0.030
18
0.0003
Concentration of tail events
without successors
0.0002
0.0001
0.0001
0.0002
0.0003
0.0004
0.0005
M@tD
Fake Empiricism/Public
(MIS)understanding of Science
Fragility Logic
A- All fragile objects dislike disorder/the disorder
cluster [by definition]. If you accept definition/
formulation, then
" Fragility can be expressed as aversion to volatility
B- Everything that is averse to uncertainty in tails
has to have a nonlinear concave response North of
the breaking point [by theorem, with R. Douady 2013]
E.g. 10% drop in the market harms more than 2 x a 5% drop
In probability of payoff
DISORDER CLUSTER
Disorder Cluster(nonparametric s)
s = | x | p(x)dx
s = | x | p(x)dx
+
s = | x | p(x)dx
Transfer Theorems
Convexity Incr. Right tail Likes vola.lity
&
Concavity Incr. LeH tail Dislikes vola.lity (or disorder
brothers)
NONLINEARITY AND
NECESSITY
Convexity Eects
For the coee cup,
Jumping 10 .mes 1
meters
1
10.00
5.00
10
1.00
100
0.10
1,000
0.01
10,000
0.001
100,000
0.0001
Zoom
Harm
fHXL
Event Size
X
A matching linear
exposure would be
very volatile for small
variations.
Degrees of Nonlinearity
Response
3.0
Broken glass !
2.5
2.0
1.5
1.0
0.5
10
15
Dose
20
1.0
Extremely high
: Heaviside
0.8
Higher
0.6
(more Sigmoidal)
0.4
Lower
(more linear)
-10
0.2
-5
10
Fully
Fully
Broken
Intact
Item
low
produces an
Item
Arcsine distribution
30
High values of
produce
10
0.2
0.4
0.6
0.8
1.0
In words
All that has bimodal distribution of type above is
necessarily nonlinear
The fragile is necessarily locally indifferent to small
variations
Banks that blow up from unexpected shocks are necessarily
10
15
L = 10
-2000
-4000
-6000
-8000
L = 20
L=0
20
Explosions of Vol
ATM
L=5
L=10
L=15
L=20
2
2
5
27
302
7686
3
3
10
79
1486
72 741
SIMPLE HEURISTIC
4
4
16
143
3298
208 429
The Heuris.c
Compute model or risk model at parameter p, p + x%, p-x%
(where x% is the average devia.on)
Model or Measure:
-Stress test ( p is the stress test, say -15%, -20%,-25%)
-ShorXall (modied VAR) by varying either vola.lity or tail level K
- Any parameter entering equa.on
Errors in ruler
BARBELL
Barbell
(Extremely Conservative)
+ (1-) Very Aggressive
Convex Transformation
Probability distribution of x
UPSIDE
Convex
Concave
Concave
Convex
Antifragile
Robust
Fragile
Fragile
0.6
60
0.5
50
0.4
40
0.3
30
0.2
20
0.1
10
-2
10
Antifragile
0.5
Fragile Zone
-5
-0.5
-1.0
10
15
20
Harm
Slowing Down
Size Effects
52
Convexity Eects
(Expecta.on)
t + t2
H 1
H (t1 ) + H (t 2 )
2
v/s
Jensens Inequality
Response f
f Hx + DxL + f Hx - DxL
2
H
fHxL
Dose
B (K )
) ( )
f x d dx
) ( )
( )
f (x d )dx
f x d dx
( )
f (x d )dx
K
1
f ( x | + ) + f ( x | ) dx f (x | ) dx
2
B (K )
B ( X ) =
1
f ( X | + ) + f ( X | ) f ( X | )
2
K
B (K ) = B (x) dx
10
11
Unemployment
Bias
1000
800
600
400
Prediction Problem
200
Deficit
C (K )
f x ( ) d dx f (x ( ) d )dx
Vulnerability
Under-diversica.on
Overspecializa.on
Projec.on error
Everywhere
Fukushima, Crisis 2007-20??,
etc.
[Protagoras problem]
Unrealis.c & incoherent
65
66
Probability
Hidden Iatrogenics
Benefits
Outcomes