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The Signal and the Silence « Back to Story
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As the '11 Red Sox illustrate, the problem with millions, billions, or millions of billions of simulations is the basis for the simulations. Whenever the basis is ill-explained or shrouded in a "proprietary" cloak, beware the simulation results. In terms of trivial sports outcomes, that is why my preferences run to sites/models such as those at WhoWins(dot)com, which presents only historical victory probabilities based upon previous best four-of-seven playoff series results. The onus is left upon the reader to determine which subset of data presented is more meaningful, and aberrations by way of unprecedented comebacks are celebrated.
The article and the authors it presents tend to ignore (thus participating in) the impact and influence of revisionism. The line that Obama thought the Stimulus would work is an example.
You can extrapolate Taleb's ideas here to a pretty wide range scenarios. The biggest that comes to mind is the popular health craze. All sorts of promises are made by product manufacturers and health gurus that they'll help you live longer--yet those promises can never be quantified. Longevity is clearly an event that cannot be predicted, yet billions of dollars are wasted on sophists who preach the illusion that they hold the keys to eternal life.
If I have the modesty to admit that some matters do not lend themselves to sound forecasts—and plan accordingly ,such like the plan about Mirror TV,you can have your forecasts.
Second, there's this central truth:
"Wall Street bankers long depended on “value-at-risk” (VaR) models to determine how much they stood to lose from a market downturn. But those instruments failed to model the housing bubble realistically before it burst, sending shock waves through the financial markets. As Taleb has often argued since the financial crash, the problem with VaR models wasn’t just that they were sometimes wrong. It was that their appearance of precision inspired too much confidence..."
The hubris of claiming to model the risks from criminal acts -- from the like of organized gangster schemes such as "Abacus" perpetrated by Goldman, Sachs -- is beyond rational understanding. There is no magical "CROOK" variable that sets its value where there world sees secrecy.
Capitalism is vulnerable to organized crime.
Baseball, too. Anybody recall betting on the Black Sox ?
The Left argue that Class Warfare stems from the central nature of Capitalism, rather than from personal greed. They are missing it. The Left does not quite understand what happens where you have criminality based on gangs or on family connections. These risks of social damage go far beyond simple greed or capitalist cost-cutting motives.
First, the full equation for this mathematics of communications was discovered by Claude Shannon and published more widely with Weaver in 1949:
Signal + Noise = Message + Equivocation
As a practical matter this can be expressed with calculus or differential equations and be used to calculate entropy for systems. There's much in engineering and science that is built on this foundation.
I would add the following: all other things being equal, if Expert A says, "Apple will hit $600 by June", and Expert B says, "I don't know what the value of Apple will be in June," people will be more inclined to believe Expert A, because the thought of a fundamentally unpredictable future is intolerable to most people no matter how obviously correct it is. They'll say to Expert B, "Why should I believe you? You have nothing to offer me. I'm already unable to predict Apple's price."
I am no stock picker, but I have to imagine there's a way to profit by consistently betting against Expert A's followers.
What Silver is talking about is the difference between stationary and nonstationary processes. Both are random, but a stationary process has some kind of constant underlying statistical order that makes it possible to predict the probability of some future value of the signal.
It's true that you can't prove whether a measured process will continue to be stationary, but recognizing the difference is vital. Engineers have known all about this for decades and it is a little disconcerting that economists consider it newfangled
An excellent analysis
After reading this outstanding essay, I couldn't help but reflect upon a comment made by Federal Reserve Board Chairman Bernanke some time ago.
When asked by a reporter to offer his thoughts on Talib's "Black Swan" book, the former Princeton economics professor responded:
"Oh ~~~ I don't read that kind of stuff."
This is a great article, and shows tremendous understanding of both books. Personally, I favor Taleb's approach to things. The author is to be congratulated for his careful analysis and Zckear writing.