*CALL FOR PAPERS** on What to Do When You Cannot Forecast – I
am co-editing a special issue of the International
Journal of Forecasting*

A mixture of my lectures at
the Courant Institute, & musings when I am bored, ranging from probability
theory & quantitative finance to computational epistemology.

* *

** PREASYMPTOTICS,
INVERSE PROBLEMS, AND
PLATONICITIES: LECTURES ON RISK & PROBABILITY**

Aims of the lectures:

In short, statistics without being an idiot savant.

· * Pre-asymptotics* (all that happens takes place outside the limit),

· * Inverse
Problems* (many models can explain the
same phenomena), and

· * Platonicities* (the reduction of the fool)

are the same illness under different symptoms.

Probability theory does not have to be Platonic. It can use mathematical tools
without being overly theoretical, or * naively* theoretical (bogus essentialism).

You can go from empiricism to formalism --looking for inverse problems and sensitivity to error in the choice of model.

** **

Lecture 1 – Platonic convergence & the Central Limit Theorem.

Lecture 2 - Preasymptotics & Small Sample Effects of α≤1 or Saint Petersburgh-Style Infinite First Moment Situations.

Lecture 3 - The fundamental problem of the 0th moment and the irrelevance of "naked probability"

Lecture 4 - An epistemological derivation of power laws - *The a Priori Problem of Small Probabilities** ***. **Summary of main idea on fat tails. Derive operational
probability --in other words what you use in your decisions.
"Beliefs" we will see do not count, but impact and payoffs.

Lecture 5 - How to Build a Poisson Buster – or why jump-diffusion is just ex-post fitting. Why "Fat Tails" are not Poisson

Lecture 6 - Option Pricing & True Fat tails

Lecture 7- Small Probabilities & The Problem of Moral Hazard

Lecture 8 - L1 “Moments”

*TECHNICAL BLOG** on Wilmott.com
–with quizzes. Raphael Douady and Bruno Dupire get things quickly.
Quizzes 1 and 2 are **here** and **here**.*

**MATHEMATICAL
POINTS BURIED IN The Black Swan or ****Fooled by Randomness, & ***COURANT INSTITUTE CLASS NOTES
& LECTURES*

* *

**Why We Have
Never Used the Black Scholes Merton Option Formula (with Espen Haug)**

** **

**Reply to Statisticians on The
Black Swan**

* *

*Technical Paper on Fat Tails, or Why the Lévy Regime
does not count** MY CENTRAL PAPER [Everything is there
–why option pricing is done by expectations of conditional mean, why
variance is for the morons, etc.]*

* *

*Some economists making
elementary confusions
about inference.*

* *

** **

**NEW STUFF –After I
switched to the Scalables**

*The Tail Exponent***MP3- NYU Courant Institute**. Where I explain that a tail exponent for a
derivatives portfolio is lower than that of the underlying; that the Central
Limit Theorem only exists in Ecole Polytechnique (we never reach the asymptote
in reality, which counts enormously for a scale-free distribution, even when
the variance is finite); how to do a Poisson buster ( the Poisson distribution
does not have scalable jumps).

* *

* *

*Note with Benoit Mandelbrot on Pre-Asymptotics and
Probability Distributions*

** **

**Why Do People Like to Truncate the Upside?** Call sellers fool themselves with
the illusion of statistical properties** **

** **

*Chapter on the Great Intellectual Fraud (GIF)** (in The Black Swan)*

** **

** **

** **

**OLD STUFF TWEAKING THE
GAUSSIAN –much of it is just mathematical exercises that I hope are
distribution-independent**

** **

**The Dentist and His Emotions****:** The
mathematics of the effect of narrow sampling period on one’s emotional
well-being. [Application of **Philostratus in Monte Carlo** in FBR]

**Path Dependent Survival** : *Monte Carlo Experiment With Path Dependence of Trader Survival
Rates.*** **Why path dependence makes a trader’s 5 year survival
slim (only pancreatic cancer has better survival rates).** **

** **

**Transaction Costs in the Literature** with
some tweaking

**Volatility Has a Natural Stochasticity to it even
in the Gaussian Homoskedastic World**__ __** **

* *

*Trading With a Stop in a Gaussian World*

* *

*Dynamic Hedging and Volatility Expectation*

* *

*Sigma-P or Volatility in Price
Space*

* *

*Option Replication and
Transaction Costs*

* *

**Introduction to Gambler’s Ruin**

** **

**The Value-at-Risk Debate**

I have always held that VAR is
charlatanism, a dangerously misleading tool –like much of modern
mathematized academic finance. These were my first forays against naive
empiricism and the use of statistics in the social sciences. My language then
was a bit primitive –the point was the same.

**"The World According to Nassim Taleb"** , the 5 page interview with *Derivatives Strategy* (January 1997) that started the debate. It is a non
technical comment on the Value-at-Risk, statistical biases in traders'
evaluations and the excesses of formalism in risk management. See Also **"In Defense of VAR"** , a reply by one Philippe Jorion, Professor of Finance at U.C. Irvine
and author of *Value-at-Risk *(Irwin,
1996). Finally, my rebuttal **"Against VAR", **a methodological statement that summarizes my position against naive
formalism and the raw application of engineering methods in risk management. I
describe the risks of misspecification and warn against the primitive (and
purely inductive methods) of frequency-based inference. In my answer to
Philippe Jorion I explain in slightly more technical terms some of the
statements made during my interview. Since then I stopped paying attention/partaking
of these debates, particularly with untrained “risk experts ” unable to
distinguish between skepticism and nihilism.