
Nassim Taleb, Loaded Questions and Statistics for Hackers - bko
https://medium.com/ml-everything/nassim-taleb-loaded-questions-and-statistics-for-hackers-18a5cceaf23
======
fwdpropaganda
> A stock (or a fund) has an average return of 0%. It moves on average 1% a
> day in absolute value; the average up move is 1% and the average down move
> is 1%. It does not mean that all up moves are 1% — some are .6%, others
> 1.45%, etc. Assume that we live in the Gaussian world in which the returns
> (or daily percentage moves) can be safely modeled using a Normal
> Distribution. Assume that a year has 256 business days. The following
> questions concern the standard deviation of returns (i.e., of the percentage
> moves), the “sigma” that is used for volatility in financial applications.
> What is the daily sigma? What is the yearly sigma?

Doesn't excuse the wrong answers, but the question has been engineered to make
it look like the answer is in the question.

As for me, I have the suspicion that at least part of the wrong answers are
more laziness than ignorance. I think that at least some of the people who
answered wrong on some random questionnaire because they couldn't be bothered
do some calculations, would do the calculations if their money depended on it.

I'm not sure I learned anything from this, other than "Nassim Taleb invented a
question that bets on you having the intuition that standard deviation is the
mean value of the absolute distance to the mean" and being lazy.

EDIT: The proof that this question is betting on people's laziness _and he
knows it_ is the fact that in the question he presents not one but TWO things
which are completely irrelevant to his point. One is the number of days in the
year, the second is that he asks for yearly sigma. But notice that neither of
those are relevant for his point, which is that people have the intuition of
"standard deviation" as "mean absolute deviation." They are only there because
if they weren't and people would just asked for "daily sigma" they would think
"the answer is in the title, there must be a trick, oh wait a minute I got
it". So not only he's betting on your laziness but additionally he's making
all he can to tip the scales in his favor.

------
nicholast
The paper claims "there exists some function that converts mean absolute
deviation to standard deviation" which is surprising and goes against my
intuition barring cases where you make assumptions about the underlying
distribution (such as approximating as Gaussian). The process of calculating
mean absolute deviation includes taking the absolute value of distance from
mean for individual points in the series, in which process information is
lost. More on the diifference between the two here:
[https://stats.stackexchange.com/questions/160436/converting-...](https://stats.stackexchange.com/questions/160436/converting-
mean-deviation-to-standard-deviation)

~~~
nicholast
Come to think of it I also addressed more about the differences between the
two in this medium post discussion of the Kelly Criterion.
[https://medium.com/@_NicT_/an-optimal-
trade-a374064fda91](https://medium.com/@_NicT_/an-optimal-trade-a374064fda91)

------
OscarCunningham
Since s.d. is larger than m.a.v. you would think that muddling the two would
make things seem more risky than they are, and hence promote risk aversion. So
it's strange that Taleb is highlighting this since he usually worries about
the _underestimation_ of risk.

~~~
bko
What I find ironic is that mean absolute deviation is just a lot more
intuitive and useful for describing a distribution for laymen. Doesn’t excuse
the professional mistaking the concepts. But it’s not like the models the
professionals rely on are using m.a.v. in their calculations rather than
standard deviation. So the whole controversy is a bit overblown ion my opinion

~~~
fwdpropaganda
> But it’s not like the models the professionals rely on are using m.a.v. in
> their calculations rather than standard deviation.

Exactly! This is another point I wanted to make on my response in this thread,
but I had already written too much. Fortunately you made the same point in one
line.

> So the whole controversy is a bit overblown ion my opinion

Just take it for what it is, which is a marketing piece for Nassim Taleb's
personal brand.

