How to Cause Catastrophes
Taleb warns that statistical results can create false confidence when models understate extreme-event risks. His criticism centers on applying Gaussian assumptions outside the conditions where they are useful.
THE IDEA
How to Cause Catastrophes
A claim of statistical significance needs to be assessed against the test’s assumptions and the data. It does not by itself establish that errors are Gaussian. Taleb’s concern is that Gaussian models can understate extreme-event risks in settings he calls Extremistan. He develops that criticism in the following account.
To show how endemic the problem of misusing the Gaussian is, and how dangerous it can be, consider a (dull) book called Catastrophe by Judge Richard Posner, a prolific writer. Posner bemoans civil servants’ misunderstandings of randomness and recommends, among other things, that government policy makers learn statistics … from economists. Judge Posner appears to be trying to foment catastrophes. Yet, in spite of being one of those people who should spend more time reading and less time writing, he can be an insightful, deep, and original thinker; like many people, he just isn’t aware of the distinction between Mediocristan and Extremistan, and he believes that statistics is a “science,” never a fraud. If you run into him, please make him aware of these things.
When to use it
Evaluating risk models in finance that rely on normal distributions for rare events.
Assessing policy recommendations based on statistical significance tests in fields like public health or economics.
Identifying when peer-reviewed studies misapply Gaussian assumptions to non-Gaussian data.
Teaching caution in interpreting p-values and confidence intervals in scientific research.
FROM THEORY TO EVERYDAY LIFE
In practice
Judge Posner's 'Catastrophe'
Taleb criticizes Richard Posner’s Catastrophe for recommending that policymakers learn statistics from economists. He argues that this advice overlooks the distinction between Mediocristan and Extremistan. The passage states Taleb’s criticism; it does not demonstrate that Posner’s recommendation caused policy failures.
A MOMENT TO REFLECT
Put it to work.
When have you encountered a claim of statistical significance that later turned out to be misleading?
How would you check whether a situation belongs to Mediocristan or Extremistan before applying Gaussian statistics?
What real-world catastrophes might result from assuming a Gaussian context where one does not exist?
Often confused with
References
- Catastrophe — Richard Posner
CONTINUE THE CONVERSATION
Source texts
- The Black Swan The Impact of the Highly Improbable With a new section On Robustness and Fragility (Nassim Nicholas Taleb)