Inside the Realm of the Black Swan
June 20, 2011 - Big Ideas
“The Fourth Quadrant: No Realm for the Normal” summarizes Nassim Taleb’s description of the realm of the Black Swan, concluding that in this realm “normal” statistical metrics and associated risk management methods do not work and that redundancy, not optimization, is key to risk management. This Fourth Quadrant encompasses return distributions that have infrequent, large, unpredictable observations (shocks) that contribute materially to return distribution statistics. In the February 2011 version of his essay entitled “Antifragility, Robustness, and Fragility inside the ‘Black Swan Domain'”, he explores this realm further in the context of models as fragile (shocks involve largely negative returns) versus anti-fragile (shocks involve largely positive returns). For investors and traders, “model” means an investment strategy or a trading setup. Using a mostly theoretical approach, he argues that: Keep Reading