arXiv subjects

Nassim N. Taleb

Publications and source records attributed to Nassim N. Taleb.

7 recordsLinked to original sources

arXiv2026

Hidden Risks and Optionalities in American Options

We develop a practical framework for identifying and quantifying the hidden layers of risks and optionality embedded in American options by introducing stochasticity into one or more of their underlying determinants. The heuristic approach remedies the problems of conventional pricing systems, which treat some key inputs deterministically, hence systematically underestimate the flexibility and convexity inherent in early-exercise features.

q-fin.RM↗

arXiv2023

Quantitative errors in the Cochrane review on "Physical interventions to interrupt or reduce the spread of respiratory viruses"

The COVID-19 pandemic has heightened the urgency to understand and prevent pathogen transmission, specifically regarding infectious airborne particles. Extensive studies validate the understanding of larger (droplets) and smaller (aerosols) particles in disease transmission. Similarly, N95 respirators, and other forms of respiratory protection, have proven efficacy in reducing the risk of infection across various environments. Even though multiple studies confirm their protective effect when adopted in healthcare and public settings for infection prevention, studies on their adoption over the last several decades in both clinical trials and observational studies have not provided as clear an understanding. Here we show that the standard analytical equations used in the analysis of these studies do not accurately represent the random variables impacting study results. By correcting these equations, it is demonstrated that conclusions drawn from these studies are heavily biased and uncertain, providing little useful information. Despite these limitations, we show that when outcome measures are properly analyzed, existing results consistently point to the benefit of N95 respirators over medical masks, and masking over its absence. Correcting errors in widely reported meta-analyses also yields statistically significant estimates. These findings have important implications for study design and using existing evidence for infection control policy guidelines.

physics.soc-ph↗

arXiv2014

Risk Neutral Option Pricing With Neither Dynamic Hedging nor Complete Markets

Proof that under simple assumptions, such as constraints of Put-Call Parity, the probability measure for the valuation of a European option has the mean derived from the forward price which can, but does not have to be the risk-neutral one, under any general probability distribution, bypassing the Black-Scholes-Merton dynamic hedging argument, and without the requirement of complete markets and other strong assumptions. We confirm that the heuristics used by traders for centuries are both more robust, more consistent, and more rigorous than held in the economics literature. We also show that options can be priced using infinite variance (finite mean) distributions.

q-fin.MF↗

arXiv2014

The Skin In The Game Heuristic for Protection Against Tail Events

Standard economic theory makes an allowance for the agency problem, but not the compounding of moral hazard in the presence of informational opacity, particularly in what concerns high-impact events in fat tailed domains (under slow convergence for the law of large numbers). Nor did it look at exposure as a filter that removes nefarious risk takers from the system so they stop harming others. \textcolor{red}{ (In the language of probability, skin in the game creates an absorbing state for the agent, not just the principal)}. But the ancients did; so did many aspects of moral philosophy. We propose a global and morally mandatory heuristic that anyone involved in an action which can possibly generate harm for others, even probabilistically, should be required to be exposed to some damage, regardless of context. While perhaps not sufficient, the heuristic is certainly necessary hence mandatory. It is supposed to counter voluntary and involuntary risk hiding$-$ and risk transfer $-$ in the tails. We link the rule to various philosophical approaches to ethics and moral luck.

q-fin.RM↗

arXiv2012

How We Tend To Overestimate Powerlaw Tail Exponents

In the presence of a layer of metaprobabilities (from uncertainty concerning the parameters), the asymptotic tail exponent corresponds to the lowest possible tail exponent regardless of its probability. The problem explains "Black Swan" effects, i.e., why measurements tend to chronically underestimate tail contributions, rather than merely deliver imprecise but unbiased estimates.

q-fin.RM↗

arXiv2012

The Future Has Thicker Tails than the Past: Model Error As Branching Counterfactuals

Ex ante forecast outcomes should be interpreted as counterfactuals (potential histories), with errors as the spread between outcomes. Reapplying measurements of uncertainty about the estimation errors of the estimation errors of an estimation leads to branching counterfactuals. Such recursions of epistemic uncertainty have markedly different distributial properties from conventional sampling error. Nested counterfactuals of error rates invariably lead to fat tails, regardless of the probability distribution used, and to powerlaws under some conditions. A mere .01% branching error rate about the STD (itself an error rate), and .01% branching error rate about that error rate, etc. (recursing all the way) results in explosive (and infinite) higher moments than 1. Missing any degree of regress leads to the underestimation of small probabilities and concave payoffs (a standard example of which is Fukushima). The paper states the conditions under which higher order rates of uncertainty (expressed in spreads of counterfactuals) alters the shapes the of final distribution and shows which a priori beliefs about conterfactuals are needed to accept the reliability of conventional probabilistic methods (thin tails or mildly fat tails).

q-fin.RM↗

arXiv2012

Mathematical Definition, Mapping, and Detection of (Anti)Fragility

We provide a mathematical definition of fragility and antifragility as negative or positive sensitivity to a semi-measure of dispersion and volatility (a variant of negative or positive "vega") and examine the link to nonlinear effects. We integrate model error (and biases) into the fragile or antifragile context. Unlike risk, which is linked to psychological notions such as subjective preferences (hence cannot apply to a coffee cup) we offer a measure that is universal and concerns any object that has a probability distribution (whether such distribution is known or, critically, unknown). We propose a detection of fragility, robustness, and antifragility using a single "fast-and-frugal", model-free, probability free heuristic that also picks up exposure to model error. The heuristic lends itself to immediate implementation, and uncovers hidden risks related to company size, forecasting problems, and bank tail exposures (it explains the forecasting biases). While simple to implement, it outperforms stress testing and other such methods such as Value-at-Risk.

q-fin.RM↗