Ever notice that even in pretty large groups a sudden hush can fall as everyone stops talking at the same time? I’ve noticed this in large classrooms filled with boisterous kids to formal dinners with great conversationalists.
When it does occur, the group usually just looks around, smiles, and moves on. The din of chatter […]
I’ve written before on the topic of stability and robustness to sudden shocks. In mathematical terms, any attempt to squeeze the second moment (volatility) of the distribution will push mass into the tails and drastically increase the fourth moment (kurtosis)
You can see above that the probability distributions with fatter tails have “thinner” bodies. While sampling […]
Zero-Sum games with results being decided far into the future can trick participants into thinking they’ve just entered a win-win transaction where both of them come out ahead. This is similar to a conman “overpaying” for goods with counterfeit money - both the conman and the merchant go home happy. The merchant is in for […]
When operating in complex environments and faced with a set of possible actions that all have completely unknown and unknowable impact, the operating procedure is to minimize the known costs. This can sometimes mean that doing nothing is the optimal choice, since there are usually transaction costs associated with every action and we should minimize […]
The problem in the world of finance is not just limited to using the Black-Scholes Model in options pricing. The “volatility smile” may or may not make up for the deficiencies in the model, but there are other far more insidious implications of assuming the world of the gaussian is relevant in the real world. […]
Joe Wikert was kind enough to interview me about Fractal Press. In the interview we discuss how we started Fractal Press by approaching the question of decision-making under uncertainty and I also mention some of the advantages this approach gives us.
You can find the interview here:
Fractal Press interview with Navanit Arakeri
Joe is a Vice President […]
I think I am beginning to understand how specialization is rewarded in the economy. Entities that specialize are essentially collecting the premium from selling put options on the dimension in which they are specializing. They are very vulnerable to abrupt state-changes and they are rewarded for this risk.
In case you are unfamiliar with put […]
Art de Vany picked up on the Nature paper describing predator foraging behavior in the wild. I was discussion exactly the same problem with Brent Pottenger. Turns out predators use Levy-walks (random walks under a Levy distribution, a.k.a Levy Flights) while foraging. The optimality of levy-walks for predators may hinge on the prey population itself […]
I find that plenty of readers who agree with the arguments presented in The Black Swan by Nassim Taleb find themselves at a loss as to how they should apply the principles outside of Hedge Funds, Venture Capital and options trading. “What should a young person do?” they ask. This is an attempt at connecting […]
There are some categories of businesses that gain a little bit at a time frequently and stand to lose a lot infrequently. I call these negatively-skewed businesses.
Banks are a classic example: they make loans and stand to gain a maximum of up to a few percentage points pretty reliably (most people generally repay their loans […]
