The Spurious Tail
Taleb’s latest on banking, luck and fat tails.
The idea is well known (see Taleb 2001), that as a population of operators in a profession marked by a high degrees of randomness increases,the number of stellar results, and stellar for completely random reasons, gets larger. The “spurious tail” is therefore the number of persons whorise to the top for no reasons other than mere luck, with subsequent rationalizations, analyses, explanations, and attributions. The performancein the “spurious tail” is only a matter of number of participants, the base population of those who tried. Assuming a symmetric market, if onehas for base population 1 million persons with zero skills and ability to predict starting Year 1, there should be 500K spurious winners Year 2,250K Year 3, 125K Year 4, etc. One can easily see that the size of the winning population in, say, Year 10 depends on the size of the basepopulation Year 1; doubling the initial population would double the straight winners. Injecting skills in the form of better-than-random abilitiesto predict does not change the story by much.
Full paper here.