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

Nassim Nicholas Taleb and Raphael Douady ()
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Nassim Nicholas Taleb: School of Engineering - New-York University

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: 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 improves on stress testing and bypasses the cillib flaws in Value-at-Risk

Keywords: Stress testing; fragility; impulse response; Jensen inequality (search for similar items in EconPapers)
JEL-codes: C00 C14 C65 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2014-12
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (1)

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ftp://mse.univ-paris1.fr/pub/mse/CES2014/14093.pdf (application/pdf)

Related works:
Working Paper: Mathematical Definition, Mapping, and Detection of (Anti)Fragility (2014)
Working Paper: Mathematical Definition, Mapping, and Detection of (Anti)Fragility (2014)
Journal Article: Mathematical definition, mapping, and detection of (anti)fragility (2013)
Working Paper: Mathematical Definition, Mapping, and Detection of (Anti)fragility (2013)
Working Paper: Mathematical Definition, Mapping, and Detection of (Anti)fragility (2013)
Working Paper: Mathematical Definition, Mapping, and Detection of (Anti)Fragility (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:14093

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