Fooled by Local Robustness

Moshe Sniedovich

Risk Analysis, 2012, vol. 32, issue 10, 1630-1637

Abstract: One would have expected the considerable public debate created by Nassim Taleb’s two best selling books on uncertainty, Fooled by Randomness and The Black Swan, to inspire greater caution to the fundamental difficulties posed by severe uncertainty. Yet, methodologies exhibiting an incautious approach to uncertainty have been proposed recently in a range of publications. So, the objective of this short note is to call attention to a prime example of an incautious approach to severe uncertainty that is manifested in the proposition to use the concept radius of stability as a measure of robustness against severe uncertainty. The central proposition of this approach, which is exemplified in info‐gap decision theory, is this: use a simple radius of stability model to analyze and manage a severe uncertainty that is characterized by a vast uncertainty space, a poor point estimate, and a likelihood‐free quantification of uncertainty. This short discussion serves then as a reminder that the generic radius of stability model is a model of local robustness. It is, therefore, utterly unsuitable for the treatment of severe uncertainty when the latter is characterized by a poor estimate of the parameter of interest, a vast uncertainty space, and a likelihood‐free quantification of uncertainty.

Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:wly:riskan:v:32:y:2012:i:10:p:1630-1637

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