

Who is right? Bruce Bueno or Nicholas Taleb? - aristus

Bueno, a smart, respected person claims he can predict world events with game theory, and apparently has a track record.
<a href="http://www.goodmagazine.com/section/Features/the_new_nostradamus" rel="nofollow">http://www.goodmagazine.com/section/Features/the_new_nostrad...</a><p>Taleb (smart, respected, etc) says it's impossible because you need "infinite precision" in your data. His track record includes the meltdown at LTCM that borked the US markets for years.
<a href="http://www.wired.com/wired/archive/15.04/play.html?pg=6" rel="nofollow">http://www.wired.com/wired/archive/15.04/play.html?pg=6</a><p>Who's right? Why?
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giardini
They are both right! Here's why:

Taleb describes two imaginary countries. The first is "Mediocristan" where
predictive math models dominate and people and events are nicely characterized
by Gaussian statistics. The second is "Extremistan" where events are
difficult, if not impossible, to predict.

Here's the bad news: we think we're living in Mediocristan but we're really
living in Extremistan.

Taleb says the models of Mediocristan do not predict "Black Swans" - the
"unknown unknowns". Their surprising occurrence isn't captured by
Mediocristan's predictive math models. So in Mediocristan the Black Swans are
characterized as outliers. Should a Black Swan occur, Mediocristan's math
modelers sweep it under the rug by either forgetting about it or by extending
the math models to include it (for "next time"). Of course next time a
_different_ Black Swan alights.

Note that there are good and bad Black Swans depending on your viewpoint.

Bueno predicts something more specific - the outcomes (e.g., wars) of
political conflict. Bueno has a mathematical model of such conflict based on
game theory. So in Taleb's parlance, Bueno's model is in Mediocristan - the
land where mathematical models prevail and no Black Swans exist.

Bueno's model sometimes fails. And sometimes events occur whose parameters
fall outside the domain of Bueno's model or any other model. Those would be
more Black Swans.

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davidw
My money would be on Taleb.

