Wednesday, September 17, 2008

Nassim Taleb On The Fourth Quadrant

Nassim Taleb, author of The Black Swan, has submitted a wonderful essay to the Edge that is available for all of us to read. I HIGHLY recommend everyone click on the link and read the entire thing- it is filled with concepts that I think no one should live without. (Opening intro is pasted below)

Introduction

When Nassim Taleb talks about the limits of statistics, he becomes outraged. "My outrage," he says, "is aimed at the scientist-charlatan putting society at risk using statistical methods. This is similar to iatrogenics, the study of the doctor putting the patient at risk." As a researcher in probability, he has some credibility. In 2006, using FNMA and bank risk managers as his prime perpetrators, he wrote the following:

The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events "unlikely."

In the following Edge original essay, Taleb continues his examination of Black Swans, the highly improbable and unpredictable events that have massive impact. He claims that those who are putting society at risk are "no true statisticians", merely people using statistics either without understanding them, or in a self-serving manner. "The current subprime crisis did wonders to help me drill my point about the limits of statistically driven claims," he says.

Taleb, looking at the cataclysmic situation facing financial institutions today, points out that "the banking system, betting against Black Swans, has lost over 1 Trillion dollars (so far), more than was ever made in the history of banking".

But, as he points out, there is also good news.

We can identify where the danger zone is located, which I call "the fourth quadrant", and show it on a map with more or less clear boundaries. A map is a useful thing because you know where you are safe and where your knowledge is questionable. So I drew for the Edge readers a tableau showing the boundaries where statistics works well and where it is questionable or unreliable. Now once you identify where the danger zone is, where your knowledge is no longer valid, you can easily make some policy rules: how to conduct yourself in that fourth quadrant; what to avoid.

John Brockman

1 comment:

Miguel Barbosa said...

Hey, thanks for the Nassim Taleb article. Great read. I already posted it up on my blog. Take care and keep up the great work.