When Taleb met Davies
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This morning, Nassim Taleb returned to Twitter, posting one of the technical appendices to his new book. And immediately he got into a wonderfully wonky twitterfight/conversation with Daniel Davies.
I don’t pretend to understand all the subtleties of the conversation between the two, but, for Tom Foster, here’s an attempt. Davies has promised a Crooked Timber post on other parts of the appendix; I’m really looking forward to that.
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Who knew that a conversation could be conducted, 140 characters at a time? LOL! :OD
Hihi; thanks a million. What I meant by linearity of preferences: when you make a decision, and there is a probability of a severely negative state (from fat tails), a nonlinear utility function would assign a huge weight to such a state and affect your decision. The Ricardians miss it because they do not envision the probability of these extreme events (nor the possibility of model error which would assign the possibility of such a state). They assume the relationships are deterministic, or not stochastic enough.
Evolutionary theory and economics are old friends. It was Malthus, a great economist, who got Darwin thinking along the lines of his eventual theory, and Spencer’s role as the Ur-evolutionist encompassed all branches of knowledge. But of course that isn’t a pedigree within which Gould would have placed himself.
An irony here: Krugman sees himself in much the same way that Gould saw himself — each is a properly credentialed expert in the field — Gould for example was the Alexander Agassiz Professor of Zoology at Harvard from 1982 on, and each could have done the technical insider stuff (about, say, the taxonomy of land snails) all his career, but Gould like Krugman preferred to talk to the broader educated public about the nature of his field.
Despite those similarities, or perhaps because of them, Krugman seeks to peg Gould as a phony.
This was fascinating. More like this, please.
The “aversion to fat tails” argument requires more than simple risk aversion but, rather, “temperance” or a negative 4th derivative of the utility function. Aversion to downside risk, which is what many people often seem to mean when invoking “fat tails” arguments, requires a positive 3rd derivative.