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How We Tend To Overestimate Powerlaw Tail Exponents

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  • Nassim N. Taleb

Abstract

In the presence of a layer of metaprobabilities (from uncertainty concerning the parameters), the asymptotic tail exponent corresponds to the lowest possible tail exponent regardless of its probability. The problem explains "Black Swan" effects, i.e., why measurements tend to chronically underestimate tail contributions, rather than merely deliver imprecise but unbiased estimates.

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  • Nassim N. Taleb, 2012. "How We Tend To Overestimate Powerlaw Tail Exponents," Papers 1210.1966, arXiv.org.
  • Handle: RePEc:arx:papers:1210.1966
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    References listed on IDEAS

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    1. N. N. Taleb & R. Douady, 2013. "Mathematical definition, mapping, and detection of (anti)fragility," Quantitative Finance, Taylor & Francis Journals, vol. 13(11), pages 1677-1689, November.
    2. Szymon Borak & Wolfgang Härdle & Rafal Weron, 2005. "Stable Distributions," SFB 649 Discussion Papers SFB649DP2005-008, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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