Prediction - Taleb vs Silver

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Prediction - Taleb vs Silver

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Examining the contrast between Nassim Taleb's insights into prediction and Nate Silver's based on their respective books Antifragile (2012) and The Signal and the Noise (2012)

Transcript of Prediction - Taleb vs Silver

  • 1. Prediction - Taleb vs Silver

2. Can we predict the future? Silver suggests we cant in a large number of domains after testing a range of past predictions. The accuracy of weather forecasting has significantly improved over the last 30 years. Earthquake predictors have generally failed. Disease epidemic predictors have generally failed. Most stock market predictors generally fail in the long run. 3. The Signal and the Noise US elections Baseball performance Poker Chess 4. The Signal and the Noise Weather forecasting is a (limited) success story. The science of earthquake forecasting seems barely to have evolved since the ninth century. Economic forecasts have often failed to predict recessions even once they were under way. 5. Prediction, forecasting and modelling A prediction is a definitive and specific statement about when and where an event (e.g. earthquake) will strike (Silver 2012) A forecast is a probabilistic statement usually over longer time scale e.g. 60% chance of earthquake over next 30 years. (Silver 2012) A model is a simplification of a real world system which attempts to represent relationships between variables. 6. Criticisms of Silver Perhaps understandably he does not highlight the uncertainty around his perfect predictions for 2012 US election. He was lucky! He talks about the importance of probabilistic statements yet describes prediction failures in forecasting election results, financial crisis. He has too much confidence in the ability of forecasting models. They cannot incorporate typically unique, non repeatable extreme events which are best studied separately. 7. The Black Swan The world is hideously more complex than a game of poker, baseball or political elections (ludic fallacy) A black swan event is an unexpected outlier that carries an extreme impact. 8. Introducing the turkey 9. A picture of the turkey on Christmas Eve 10. Did the turkey make a statistical miscalculation? According to Bayes theorem, every episode of the turkey being fed by a generous owner made it more confident of its safety. Think stock market crashes (Lehman Brothers, Enron etc) where incorporating past data makes you more confident of the validity of a positive trend and more likely to be harmed by the eventual crash. 11. Anti-Fragility Build in redundancies (Fukushima, flood defences) Do not suppress randomness with tight controls. Make sure participants have skin in the game Expose yourself to positive black swans Take risks with a known limited downside and unbounded upside. 12. Extremistan and Mediocristan In Mediocristan, large samples contain no single instance that will significantly change the aggregate or total. The largest observation is insignificant to the sum (weights, heights, calorie intake, mortality rates) In Extremistan, inequalities are such that one single observation can disproportionately impact the aggregate or total (wealth, income, book sales, deaths in war, inflation rates, economic data) 13. The normal (Gaussian) distribution 14. Why cant I predict in Extremistan? Imperfect information Feedback loops Chain reactions (positive/negative spirals) Past data is taken from the world in a very different state to the present (or future) and extrapolated Models are simplifications of the real world. Models typically rely on tractable statistical distributions (e.g. normal distribution) with thin tails. 15. What can we predict? The relative fragility, robustness and anti- fragility between two systems/objects. Mediocristan (sports, poker, elections) Short term trends in Extremistan but not the extreme event (MUCH more important). Do not fall for the ludic fallacy of perceiving the world as a simple, well organised game subject to consistent rules. 16. First, do no harm Predicting the weather, making small bets on sports or political elections is not going to harm or threaten society (minimal downside) Predicting budget deficits, interest rates, inflation rates, stock prices many years into the future can threaten the fabric of society if they are taken seriously and no contingencies are prepared (potentially large downside) 17. Conclusion We generally cannot predict the timing of black swan events without insider information. We cannot predict the severity of black swan events. We can assess the comparative fragility, robustness or anti-fragility of systems rather than trying to predict the exact timing, severity of the rare event. Make yourself robust or anti-fragile (if possible) to uncertain future events.