The Signal and the Noise: Why So Many Predictions Fail-but Some Don't

this book encourages readers to think carefully about the signal and the noise and to seek out forecasts that couch their predictions in percentage or probabilistic terms. They are a more honest representation of the limits of our predictive abilities. When a prediction about a complex phenomenon is expressed with a great deal of confidence, it may

On average, in the five presidential elections since 1992, the typical “fundamentals-based” model—one that ignored the polls and claimed to discern exactly how voters would behave without them—has missed the final margin between the major candidates by almost 7 percentage points.35 Models that take a more fox-like approach, combining economic data

In most cases, we cannot test our ideas as quickly as Google, which gets feedback more or less instantaneously from hundreds of millions of users around the world. Nor do we have access to a supercomputer, as Deep Blue’s engineers did. Progress will occur at a much slower rate. Nevertheless, a commitment to testing ourselves—actually seeing how wel

The Productivity Paradox

Now we have the makings of a financial crisis: home buyers’ bets were multiplied fifty times over. The problem can be summed up in a single word: leverage. If you borrow $20 to wager on the Redskins to beat the Cowboys, that is a leveraged bet.* Likewise, it’s leverage when you borrow money to take out a mortgage—or when you borrow money to bet on

economic forecasts are blunt instruments at best, rarely being able to anticipate economic turning points more than a few months in advance. Fairly often, in fact, these forecasts have failed to “predict” recessions even once they were already under way: a majority of economists did not think we were in one when the three most recent recessions, in

This logic is a little circular. TV weathermen say they aren’t bothering to make accurate forecasts because they figure the public won’t believe them anyway. But the public shouldn’t believe them, because the forecasts aren’t accurate. This becomes a more serious problem when there is something urgent—something like Hurricane Katrina. Lots of Ameri

Sensible buyers will avoid transacting in a market like this one at any price. It is a case of uncertainty trumping risk. You know that you’d need a discount to buy from him—but it’s hard to know how much exactly it ought to be.

Finally, there are periodic interruptions from volcanoes, which blast sulfur—a gas that has an anti-greenhouse effect and tends to cool the planet— into the atmosphere. The eruption of Mount Pinatubo in 1991 reduced global temperatures by about 0.2°C for a period of two years, equivalent to a decade’s worth of greenhouse warming. The longer your ti