Watts Up With That?

Guest Post by Willis Eschenbach

Following up on his brilliant earlier work „The Black Swan”, Taleb has written a paper called Error, Dimensionality, and Predictability (draft version). I could not even begin to do justice to this tour-de-force, so let me just quote the abstract and encourage you to read the paper.


taleb error paperAbstract—Common intuitions are that adding thin-tailed variables with finite variance has a linear, sublinear, or asymptotically linear effect on the total combination, from the additivity of the variance, leading to convergence of averages. However it does not take into account the most minute model error or imprecision in the measurement of probability. We show how adding random variables from any distribution makes the total error (from initial measurement of probability) diverge; it grows in a convex manner. There is a point in which adding a single variable doubles the total error. We show the effect in probability…

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