Binary prediction true exposure and climate change

Taleb and Tetlock (2013) argue in their paper “On the difference between Binary Prediction and True Exposure” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2284964, that we have to be aware of the difference between “binary” (only two possible outcomes) and “vanilla” (multiple outcomes) scenarios. Vanilla exposures are sensitive to Black Swan effects, model errors and prediction problems, while binary are more immune to them. Indeed we might see fewer fat tails events, but their impact will get stronger.  This is also an issue for climate change models and we have to be aware of our limited perspective if we argue the effects of climate change such as the discussion  around the Stern Review (http://en.wikipedia.org/wiki/Stern_Review).  

 

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