There’s a new pop-stats book making the rounds, and it’s been generating quite a bit of buzz – at least, as far as pop-stats books go. Nate Silver, who is probably best known as the author of the New York Times’ FiveThiryEight politics blog, delves into the tricky art of predictioneering in The Signal and the Noise: Why So Many Predictions Fail – but Some Don’t.
After the style of one of our favorite authors – Nassim Nicholas Taleb – Silver is adding to the volumes describing how complicated and messy it is to make predictions. The reviews so far are generally positive, and anything aimed at taking down the over-inflated talking heads – who lurch from one confident forecast to another without pausing to tally up their misses – is welcome. Unfortunately, what we like to think of as common wisdom these days doesn’t seem to be sinking in – especially in the financial world. That’s why, when we see articles like today’s gem from CNN Money entitled “The Stock Market Rally is Over,” we can only shake our heads:
Despite a slowing global economy, political and fiscal uncertainty and ongoing turmoil in Europe, the U.S. stock market has delivered quite the performance this year, thanks in large part to stimulus efforts by the world’s central banks.
But experts believe the robust gains are now remnants of the past. In fact, according to an exclusive CNNMoney survey of 37 investment strategists and money managers, the S&P 500 will finish 2012 at 1,440, up a healthy 15% for the year but in the exact same spot where it started the fourth quarter.
Sigh. With no acknowledgement of uncertainty, the analysts’ guesses are averaged to come up with a straightforward “prediction” produced by their survey. In cases like these, we’d be much better served framing the analysts’ guesses as probabilities: what are the odds that the market will end Q4 up, down, or flat, and how confident can we be in assigning such probabilities? Hopefully the more that writers like Silver tackle these sorts of fallacious prediction-making, the less we’ll have to put up with such terrible forecasts in the future.
Not all of the reviews of Silver’s new tome are glowing – several reviewers complain that Silver bounces a little too frequently between topics, and express disappointment that the book doesn’t do more to provide some practical instruction on improving predictions. Nevertheless, it looks promising, and is certainly going to be on our reading list in the near future.
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