SSRN-We Don't Quite Know What We are Talking About When We Talk About Volatility by Daniel Goldstein, Nassim Taleb(March 28, 2007)

SSRN-We Don't Quite Know What We are Talking About When We Talk About Volatility:

Daniel G. Goldstein
London Business School

Nassim Nicholas Taleb
London Business School


March 28, 2007



Abstract:
Finance professionals, who are regularly exposed to notions of volatility, seem to confuse mean absolute deviation with standard deviation, causing an underestimation of 25% with theoretical Gaussian variables. In some fat tailed markets the underestimation can be up to 90%. The mental substitution of the two measures is consequential for decision making and the perception of market variability."