The Signal and the Noise

The signal and the noise The signal and the noise: why most predictions fail but some don’tNate Silver; Penguin Press 2012

 

The Boston Red Sox failed to make the playoffs in 2011 despite having a 99.7 percent chance of doing so at one point27—although I wouldn’t question anyone who says the normal laws of probability don’t apply when it comes to the Red Sox or the Chicago Cubs.Silver

“When the facts change, I change my mind,” the economist John Maynard Keynes famously said. “What do you do, sir?”

Chaos theory applies to systems in which each of two properties hold: The systems are dynamic, meaning that the behavior of the system at one point in time influences its behavior in the future; And they are nonlinear, meaning they abide by exponential rather than additive relationships.Silver

Successful gamblers—and successful forecasters of any kind—do not think of the future in terms of no-lose bets, unimpeachable theories, and infinitely precise measurements. These are the illusions of the sucker, the sirens of his overconfidence. Successful gamblers, instead, think of the future as speckles of probability, flickering upward and downward like a stock market ticker to every new jolt of information. When their estimates of these probabilities diverge by a sufficient margin from the odds on offer, they may place a bet.Silver

“The market can stay irrational longer than you can stay solvent.”Keynes

Bayes’s theorem begins and ends with a probabilistic expression of the likelihood of a real-world event. It does not require you to believe that the world is intrinsically uncertain. It was invented in the days when the regularity of Newton’s laws formed the dominant paradigm in science. It does require you to accept, however, that your subjective perceptions of the world are approximations of the truth.Silver