Interview with Nate Silver

The site Index Universe posts an interview with the one and only Nate Silver, who discusses, among other things, the destructive power of overconfidence when making predictions:

IU: What I’ve taken away from the book is that the vast majority of experts are stunningly bad at making predictions.

Silver: That’s the whole irony, I guess. There are specific studies that find that the more often people go on TV, the worse advice they tend to give. When I talk to groups, I try to preach a certain amount of humility before these big, difficult problems that we face and tonot tell people that if they do this and that, then magic will occur.

IU: What do you see as the common theme among bad predictions? What most often leads people astray?
 A lot of it is overconfidence. People tend to underestimate what the uncertainty that is intrinsic to a problem actually is. If you have someone estimate what they think a confidence interval is that’s supposed to cover 90 percent of all outcomes, it usually only covers 50 percent. You have upside outcomes and downside outcomes in the market certainly more often than people realize.

There are a variety of reasons for this. Part of it is that we can sometimes get stuck in the recent past and examples that are most familiar to us, kind of what Daniel Kahneman called “the availability heuristic,” where we assume that the current trend will always perpetuate itself, when actually it can be an anomaly or a fluke, or where we always think that the period we’re living through is the “signal,” so to speak. That’s often not true—sometimes you’re living in the outlier period, like when you have a housing bubble period that you haven’t historically had before.

Overconfidence is the core linkage between most of the failures of predictions that we’ve looked at. Obviously, you can look at that in a more technical sense and see where sometimes people are fitting models where they don’t have as much data as they think, but the root of it comes down to a failure to understand that it’s tough to be objective and that we often come at a problem with different biases and perverse incentives—and if we don’t check those, we tend to get ourselves into trouble.

His book The Signal and the Noise is still at the top of my to-read list. (HT: Barry Ritholtz)


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