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Image source: Centers for Disease Control and Prevention

Some have argued mainly in social media that multiplicative processes have higher risks than additive. This is a misunderstanding: risk does not depend on the model of a phenomenon but on its impact on an observable quantity. In fact, some additive processes may have higher impact than multiplicative. After all, the relative impact depends on how things are multiplied versus how they are added. It can be shown that every additive process has an implicit multiplicative nature.

In another article I wrote why most deaths are multiplicative. The reason for that is as follows: the death of a person in reproductive age reduces future population growth in a multiplicative fashion because descendant generation is terminated. Since the average family in USA for example has about 1.9 children, then the effect on population reduction due to a death of a person in reproductive age is shadow-multiplicative according to the model in the referenced article above. …


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Image by Steven Pinker

Steven Pinker insisted in Twitter yesterday that

The two world wars were spikes, not harbingers of a trend. Since end of WWII, death rates have roller-coastered down.

Here is the tweet:

For fat-tailed variables, the mean is almost entirely determined by extremes. If you are uncertain about the tails, then you are uncertain about the mean.

Many traders and investors know the above but apparently a large population of social scientists who are otherwise good and enjoyable people fail to understand it.

One fundamental reason for the lack of understanding is that fat tails are not covered in undergraduate curriculum and even in the first part of graduate courses. …


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Real GDP. Source BEA

This article was originally published in Price Action Lab Blog.

I am not saying this, the BEA states that on their website but they went ahead and extrapolated a large fall in GDP for second quarter four months into the future. Below are the details.

The way second quarter GDP was reported has left the impression in the minds of many people not familiar with the math that the economy shrank 32.9% in the second quarter. I saw numerous tweets claiming that by individuals but also by mainstream financial media.

Although the BEA release was technically correct, many focused on the -32.9% …

About

Michael Harris

Quant systematic and discretionary trader, trading book author and developer of DLPAL machine learning software. No investment advice. #quant #trading #finance

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