Edge 258: Nassim Taleb: "The Fourth Quadrant"

Edge 258 - September 25, 2008

(5,150 words)

http://www.edge.org

This online EDGE edition is available at:
http://www.edge.org/documents/archive/edge258.html

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THE THIRD CULTURE
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ECONOMIC DIS-EQUILIBRIUM
Can You Have Your House And Spend It Too?
By George Dyson

George Dyson writes: "Readers of Nassim Taleb's The Fourth Quadrant may enjoy the following piece on fraud-resistant financial instruments of the 13th century—progenitors of a multitude of derivatives that are plaguing us today." ...

...The breakthrough was in money being duplicated: the King gathered real gold and silver into the treasury through the Exchequer, with the tally given in return attesting to the credit of the holder who could enter into trade, manufacturing, or other ventures, eventually producing real wealth with nothing more than a notched wooden stick. So what's the problem? Aren't we just passing around digital versions of the tallies we've been using for almost one thousand years? Aren't mortgages, whether prime or sub-prime, just a modern version of paying for houses with fraud-resistant sticks? ...

http://www.edge.org/documents/archive/edge258.html#dysong

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THE REALITY CLUB
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Jaron Lanier & George Dyson
On Nassim Taleb's "The Fourth Quadrant: A Map of the Limits of Statistics"

GEORGE DYSON: ...What to do now? I'd prefer less Paulson, and more Newton. In the 17th century, English coinage had become widely debased, much as our system of financial instruments has become debased today. In 1696, Sir Isaac Newton was appointed Warden of the Mint, with authority to prosecute counterfeiters, who were not only hung, but drawn and quartered. This, accompanied by a systematic recoinage, worked.

JARON LANIER: This is a superb piece and I hope it is widely read and taken to heart in Wall Street, Silicon Valley, and Washington. All these centers of power and creativity are drowning in illusions brought about by thunderous misuses of statistics that have become implacably seductive only with the recent availability of vast, connected computer resources.

Edge.org has become the most dramatic point of contact between the critics and supporters of the fallacies Taleb elucidates. ...

http://www.edge.org/documents/archive/edge258.html#rc

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EDGE

John Brockman, Editor and Publisher
Russell Weinberger, Associate Publisher
Karla Taylor, Editorial Assistant

Copyright (c) 2008 by EDGE Foundation, Inc.
All Rights Reserved.

Published by EDGE Foundation, Inc.,
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Edge 257: Nassim Taleb - "The Fourth Quadrant"

Edge 257 - September 15, 2008

(7,950 words)

http://www.edge.org

This online EDGE edition is available at:
http://www.edge.org/documents/archive/edge257.html

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THE THIRD CULTURE
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"Statistical and applied probabilistic knowledge is the core of knowledge; statistics is what tells you if something is true, false, or merely anecdotal; it is the "logic of science"; it is the instrument of risk-taking; it is the applied tools of epistemology; you can't be a modern intellectual and not think probabilistically - but... let's not be suckers. The problem is much more complicated than it seems to the casual, mechanistic user who picked it up in graduate school. Statistics can fool you. In fact it is fooling your government right now. It can even bankrupt the system (let's face it: use of probabilistic methods for the estimation of risks did just blow up the banking system). "

THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS
By Nassim Nicholas Taleb

An Edge Original Essay

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

NASSIM NICHOLAS TALEB, essayist and former mathematical trader, is Distinguished Professor of Risk Engineering at New York University's Polytechnic Institute. He is the author of Fooled by Randomness and the international bestseller The Black Swan.

PERMALINK: http://www.edge.org/3rd_culture/taleb08/taleb08_index.html

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This online EDGE edition is available at:
http://www.edge.org/documents/archive/edge257.html
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Edge Foundation, Inc. is a nonprofit private operating foundation under Section 501(c)(3) of the Internal Revenue Code.
----------------------------------------------------
----------------------------------------------------
EDGE

John Brockman, Editor and Publisher
Russell Weinberger, Associate Publisher
Karla Taylor, Editorial Assistant

Copyright (c) 2008 by EDGE Foundation, Inc.
All Rights Reserved.

Published by EDGE Foundation, Inc.,
5 East 59th Street, New York, NY 10022

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