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Taleb's response to this article: https://twitter.com/nntaleb/status/1115684446081040386 https://twitter.com/nntaleb/status/1115684446081040386

ska 7y ago
He remains a real charmer I see.
- tomp 7y ago
  But is he wrong?
  - ska 7y ago
    Orthogonal question. Unless you mean "Is he wrong in his approach?". Then probably yes.
  - throwawaymath 7y ago
    In regards to the very specific claim that the volatility of an option's price decreases asymptotically as the uncertainty of its underlying increases? No, that's entirely correct. In regards to Nate Silver's forecasts more generally? I don't know - it's hard to get past the tone of his arguments to understand what his actual disagreement is.
  - aubreyclayton 7y ago
    He is wrong in that the sentence of his that I quoted contained two statements: "when the volatility of the underlying security increases, [1] arbitrage pressures push the corresponding binary option to trade closer to 50% and [2] become less variable over the remaining time to expiration." His calculation proves [1], but it's [2] that is the basis of his criticism of Silver. And it's just not true, as can be seen even in a simple random-walk model.
    - mike_ivanov 7y ago
      Prove it.
    - mike_ivanov 7y ago
      "[2] become less variable over the remaining time to expiration ... And it's just not true, as can be seen even in a simple random-walk model." Dear @aubreyclayton, I'm genuinely interested in seeing how you arrived at this conclusion. Would you kindly share the proof, or at least explain the logic behind it. Thank you.
      - aubreyclayton 7y ago
        Sure. If you've studied stochastic processes like Brownian motion, check out the derivation starting with the last paragraph on p.4 of this note: https://drive.google.com/file/d/1tQj4ZGja6jKADJGiFj-dcQAirWoUFX46/view?usp=sharing https://drive.google.com/file/d/1tQj4ZGja6jKADJGiFj-dcQAirWo... If that's foreign to you, you might be interested in this write-up I did about election-forecasting in which I considered the same example, just in discrete time rather than continuous time: http://nautil.us/issue/70/variables/how-to-improve-political-forecasts http://nautil.us/issue/70/variables/how-to-improve-political... The basic idea is that if you increase the volatility of a random-walk process, say by making the step-sizes larger, that won't actually make the probability of finishing above where you started any less (or more) volatile. The higher volatility means that from any given starting point your final resting place is more dispersed, but you're also more likely to range farther from home as you go. The two effects exactly cancel. Taleb's critique misses the second part of that.
        mike_ivanov 7y ago
        Thank you.
baron_harkonnen 7y ago
It's worth noting that Clayton has a much more thorough, mathematical response to Taleb's paper (written back in November): https://drive.google.com/file/d/1tQj4ZGja6jKADJGiFj-dcQAirWoUFX46/view https://drive.google.com/file/d/1tQj4ZGja6jKADJGiFj-dcQAirWo... Since Taleb delights in make his mathematical writing as opaque as possible, it's a useful read in just to know exactly the claims that Taleb is making in his paper.
- thanatropism 7y ago
  By that link's characterization Taleb's argument is pure fluff.

ska 7y ago

He remains a real charmer I see.

tomp 7y ago
But is he wrong?
- ska 7y ago
  Orthogonal question. Unless you mean "Is he wrong in his approach?". Then probably yes.
- throwawaymath 7y ago
  In regards to the very specific claim that the volatility of an option's price decreases asymptotically as the uncertainty of its underlying increases? No, that's entirely correct. In regards to Nate Silver's forecasts more generally? I don't know - it's hard to get past the tone of his arguments to understand what his actual disagreement is.
- aubreyclayton 7y ago
  He is wrong in that the sentence of his that I quoted contained two statements: "when the volatility of the underlying security increases, [1] arbitrage pressures push the corresponding binary option to trade closer to 50% and [2] become less variable over the remaining time to expiration." His calculation proves [1], but it's [2] that is the basis of his criticism of Silver. And it's just not true, as can be seen even in a simple random-walk model.
  - mike_ivanov 7y ago
    Prove it.
  - mike_ivanov 7y ago
    "[2] become less variable over the remaining time to expiration ... And it's just not true, as can be seen even in a simple random-walk model." Dear @aubreyclayton, I'm genuinely interested in seeing how you arrived at this conclusion. Would you kindly share the proof, or at least explain the logic behind it. Thank you.
    - aubreyclayton 7y ago
      Sure. If you've studied stochastic processes like Brownian motion, check out the derivation starting with the last paragraph on p.4 of this note: https://drive.google.com/file/d/1tQj4ZGja6jKADJGiFj-dcQAirWoUFX46/view?usp=sharing https://drive.google.com/file/d/1tQj4ZGja6jKADJGiFj-dcQAirWo... If that's foreign to you, you might be interested in this write-up I did about election-forecasting in which I considered the same example, just in discrete time rather than continuous time: http://nautil.us/issue/70/variables/how-to-improve-political-forecasts http://nautil.us/issue/70/variables/how-to-improve-political... The basic idea is that if you increase the volatility of a random-walk process, say by making the step-sizes larger, that won't actually make the probability of finishing above where you started any less (or more) volatile. The higher volatility means that from any given starting point your final resting place is more dispersed, but you're also more likely to range farther from home as you go. The two effects exactly cancel. Taleb's critique misses the second part of that.
      - mike_ivanov 7y ago
        Thank you.

baron_harkonnen 7y ago

It's worth noting that Clayton has a much more thorough, mathematical response to Taleb's paper (written back in November): https://drive.google.com/file/d/1tQj4ZGja6jKADJGiFj-dcQAirWoUFX46/view https://drive.google.com/file/d/1tQj4ZGja6jKADJGiFj-dcQAirWo... Since Taleb delights in make his mathematical writing as opaque as possible, it's a useful read in just to know exactly the claims that Taleb is making in his paper.

thanatropism 7y ago
By that link's characterization Taleb's argument is pure fluff.