We Don't Quite Know What We Are Talking About

摘要

Finance professionals, despite regular exposure to notions of volatility, seem to confuse mean absolute deviation with standard deviation. In some fat tailed markets, theoretical Gaussian variables can be underestimated by as much as 90%. It is not a lack of statistical knowledge that appears to be the impediment, but rather difficulty in translating a non-linear measure into a real-world application. Mental substitution of the two measures is consequential for decision-making and the perception of market variability.