Thursday, March 20, 2014


Surprise and Digression | The Leisure of the Theory Class:  An interesting area.  What is a "surprise"?  When thinking about economic expectations, the surprise is something that is unusual, it is something that is not expected.  Does this mean that it is at the tail of the probability distribution?  Does it mean something outside of that distribution?  Is it possible to use insights from other fields to get of a handle on this and assist in the understanding of crash risk?

"They propose that surprise be measured by the Kullback-Liebler divergence between the prior and the posterior. As with many good ideas, Itti and Baldi are not the first to propose this. C. L. Martin and G. Meeden did so in 1984 in an unpublished paper entitled: `The distance between the prior and the posterior distributions as a measure of surprise.’ Itti and Baldi go further and provide experimental support that this notion of surprise comports with human notions of surprise. Recently, Ely, Frankel and Kamenica in Economics, have also considered the issue of surprise, focusing instead on how best to release information so as to maximize interest."

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