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The Signal and the Noise

The Signal and the Noise

Nate Silver
2012
T4 552 pages · about 9h 12m to read OL16700318Wgoodreads

Summary

Silver examines forecasting across domains where records exist, and argues that the difference between good and bad forecasting is a specific set of practices rather than better models or more data.

The domains he covers include weather forecasting, which he identifies as one of the genuine success stories with measurable improvement over decades; earthquakes, where he argues prediction is not currently possible and the attempts have produced false confidence; economics, where he documents that forecasters do not publish confidence intervals and that the intervals they do have are far wider than users assume; baseball, poker, chess, political polling, epidemiology and climate.

His central prescription is Bayesian reasoning, meaning starting from a prior probability, updating it in proportion to how diagnostic new evidence is, and stating beliefs as probabilities rather than as positions. He argues that the failure to state a prior is what makes most forecasting unfalsifiable and unimprovable. His analysis of the 2008 crisis identifies four specific failure points: the rating agencies' models assumed regional rather than national default correlation, the housing boom was treated as sustainable, the effects of the collapse were underestimated, and the models were built on data from a period containing no comparable event.

The book was published in 2012 and Silver's own subsequent forecasting record has been mixed, particularly around 2016, which he addressed by noting his model gave a higher probability than others. The critique that Bayesian methods depend on the prior, which is chosen rather than derived, applies to his prescription. The domain comparisons are the most valuable part.

Key takeaways 8

  1. Forecasting quality differs enormously by domain, and weather forecasting has improved measurably while economic forecasting has not.
  2. Beliefs should be stated as probabilities and updated in proportion to how diagnostic new evidence is, which is the Bayesian prescription.
  3. Failing to state a prior probability makes a forecast unfalsifiable and therefore unimprovable.
  4. Economic forecasts are published without confidence intervals, and the actual intervals are far wider than users assume.
  5. Rating agency models before 2008 assumed regional rather than national correlation in mortgage defaults, which invalidated every conclusion drawn from them.
  6. Models built on data from a period containing no comparable event contain no information about such an event.
  7. More data increases the number of spurious relationships available, which means better data does not automatically produce better forecasts.
  8. Forecasters who make many small updates outperform those who hold a position and revise it dramatically or not at all.

Who should read it

Anyone who makes or consumes forecasts and wants a comparison of which domains forecast well and what the successful ones do differently.

Where it sits in the reference 3

Philosophy
Mental models
Mental models

Who recommended it 3 · 2 direct

All book reviews — Gates Notes
Chai with Pabrai bookshelf — Entrepreneurship, Management and Leadership
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