Categories
Book review

Statistical Consequences of Fat Tails: Real World Preasymptotics, Epistemology, and Applications

by Nassim Nicholas Taleb

52686856

I’ve just started reading this, and wanted to say TYPOS before I forgot. Not that I could forget, there’s one every couple of pages. Which is annoying, as there is clearly good stuff in here, from which this detracts – those formulae that I can’t quite follow through, is that a typo, an error by the author, or just me being dim? Hmm… I shall report more as I get further in…

Right, we’ve finished it now. Taleb is certainly opinionated – very opinionated about other people and their views, at times, and personally I felt this rather detracted from the writing. Keep it for the Twitter wars, mate, really.

The book is a compilation of a number of papers, some of them quite technical, about the subject matter. Throughout, I ran into the issue mentioned in the first paragraph – typos are rife, and quite disturbing in the middle of formulae or proofs.

Much of what Taleb says, however, is important, even if he does rather aim at getting in his retribution first against his perceived opposition. He’s quite right, fundamentally, about the difference between probability and reality: in the real world, there are no probabilities – things happen, or they don’t. Probability expresses our uncertainty, not a real-world property of objects (perhaps quantum mechanics aside – although by some interpretations, this is just as true there, too). So we need to be very very careful when we apply simple to manipulate theorems of probability (such as the Gaussian distribution) to real-world problems, especially when we are making high-impact decisions based on the result of those manipulations. Examples abound, but the most dramatic is perhaps the Value at Risk (VaR) calculations that were supposed to keep our financial institutions “safe” during market turbulence, and which so spectacularly failed to do so in the 2008 financial crisis.

Tough for me to review this book usefully. I’m pretty mathematically smart, but I still couldn’t follow all of the arguments. I’m sure others with more of the appropriate background could do so, but in this case I’m not sure it went far enough. Replacing VaR by Extreme Value Theory is all very well to talk about in principle, but you’re going to need a lot more detail to make it practical, for example.

Three stars, in the end, for the sound argument, counterbalanced by TYPOS and unnecessary sarcasm from the author.