Nassim Taleb Submits a paper on why most people misunderstand the ideas of black swans.
Abstract (via SSRN):
The point of The Black Swan is that both empirical knowledge (i.e. extrapolating statistics) and a priori theories fail in the tails and it is vital to “robustify” against it using the concepts of “the fourth quadrant”. The point has been garbled by members of the economics establishment that claim mistakenly “we know that” and “we know about fat tails” or “power laws”. This is both wrong and not my point. The paper presents corrections to the misperceptions.
Introduction (Via SSRN)
Summary of the problem discussed in The Black Swan (and associated papers): The problem, simply stated (which I have had to repeat continuously) is about the degradation of knowledge when it comes to rare events (“tail events”), with serious consequences in some domains I call “Extremistan” (where these events play a large role, manifested by the disproportionate role of one single observation, event, or element, in the aggregate properties). I hold that this is a severe and consequential statistical and epistemological problem as we cannot assess the degree of knowledge that allows us to gauge the severity of the estimation errors. Alas, nobody has examined this problem in the history of thought, let alone try to start classifying decision-making and robustness under various types of ignorance and the setting of boundaries of statistical and empirical knowledge.
Furthermore, to be more aggressive, while limits like those attributed to Gödel bear massive philosophical consequences, but we can’t do much about them, I believe that the limits to empirical and statistical knowledge I have shown have both practical (if not vital) importance and we can do a lot with them in terms of solutions, with the “fourth quadrant approach”, by ranking decisions based on the severity of the potential estimation error of the pair probability times consequence (Taleb, 2009; Makridakis and Taleb, 2009; Blyth, 2010, this issue).
A more compact summary: theories fail most in the tails; some domains are more vulnerable to tail events.
Key Mistakes Made While Interpreting Black Swans (excerpted via SSRN):
1. It is not quite about the Gaussian distribution
2. There’s no such thing as a historical event in the probabilistic sense
3. Folk Psychology, & Philosophy of Probability
4. The problem of induction, causation, and complexity