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Pulp Perusal Posse: Chapter One

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Discuss chapter 1 of Nate Silver's "The Signal and the Noise".

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I bought Nate Silver's book because I liked his baseball work and his political predictions were absolutely bang on. Here at PPP (and in other corners of the hockey internet) we spend a lot of time looking at predictions and while reading chapter one of this book it became immediately obvious that we should be talking about this.

The way I envisioned the PPP Pulp Perusal Posse functioning was to highlight sections and talk about them. Here in week one I'm going to post some of my thoughts to kickstart things, but I hope in the future that we can move to a more community led style to take this in different directions.

Risk vs. Uncertainty

Risk ... is something that you can put a price on. Say that you'll win a poker hand unless your opponent draws to an inside straight: the chances of that happening are exactly 1 in 11. This is risk. It is not pleasant when you take a "bad beat" in poker, but at least you know the odds of it and can account for it ahead of time.

Uncertainty, on the other hand, is risk that is hard to measure. [1]

Recognizing Trends

In December 2007, economists in the Wall Street Journal forecasting panel predicted only a 38 percent likelihood of a recession over the next year. This was remarkable because, the data would later reveal, the economy was already in recession at the time. [2]

Out-of-Sample Problems

When we expand our sample to include events further apart from us in time and space, it often means that we will encounter cases in which the relationships we are studying did not hold up as well as we are accustomed to. The model will seem to be less powerful. ... Our personal and professional incentives almost always discourage us from doing this.

...

One of the pervasive risks that we face in the information age ... is that even if the amount of knowledge in the world is increasing, the gap between what we know and what we think we know may be widening. [3]

1. Silver, Nate "The Signal and the Noise" Kindle edition accessed October 14th, 2012, loc. 531
2. Ibid, loc. 603
3. Ibid, loc. 819