Saturday, January 20, 2018

Easy to Predict, Hard to Be Right

    Nate Silver made his name predicting the performance of baseball players. Now he produces the FiveThirtyEight blog, known for its accurate forecasts in sports, politics and other fields.

     One distinction he draws is the difference between a prediction and a forecast. A prediction is a specific statement about when and how something will occur. A forecast is a probabilistic statement. So, for example, science cannot predict when or where an earthquake will occur. But it can forecast with confidence that at some point over the next hundred years there will be a major earthquake in California, and that California will experience more earthquakes than New Jersey.

     Similarly, no one can predict with any degree of certainty where the S & P will stand at the end of 2018. Or when the next stock market crash will occur. But we do know the chances of a crash are less than 5% when the average PE ratio is under 15, but 20% when the average PE ratio is over 30. (The current PE of the Dow Jones Average is 26, and the S&P is 23.)

     Same goes for the weather. Weather forecasters don't say it will rain tomorrow. They say there's a 60% chance of rain tomorrow -- meaning that given current conditions, the data show that it rains 60 % of the time within the next 24 hours.

     Except, Silver also tells us about the "wet bias." Weather reports typically exaggerate the chance of rain. Why? Because meteorologists know that if they say it's not going to rain, and it does, then the audience will get mad at them. But if they forecast rain, and it doesn't rain, then the audience considers it a bonus -- and doesn't blame the forecaster for being wrong. The "wet bias" will typically predict a 20% chance of rain when there is really only a 5 to 10% chance of rain.

     Silver has some advice for us regular people about making predictions in our own lives. For example, he warns us that there is a ton of information available these days, but much of it is merely a distraction. To be a good forecaster, we need focus on the facts that actually make a difference to any particular issue in our lives.

     Also, people tend to attach too much importance to recent events that may seem dramatic, but are not really significant. We also focus on familiar places and nearby events, whether they affect the larger world or not. And we all have our prejudices and biases. Human beings naturally prefer information that supports their own views. The way to break out of our tunnel vision is to test our views in the real world, acknowledge our mistakes and learn from them.

     Typically, people who are more skeptical about information and less confident in themselves make better predictions than people who are more grounded in their own beliefs. People who have firm convictions make good politicians and good talk show guests. But they make bad predictions. People who are less certain about the world, who are more tolerant of dissenting opinions, and who know that sometimes our lives are shaped by unforeseen events, make better predictions because they understand that many issues are complex and conditional.

     We all make predictions based on our knowledge and experience. The way to become more accurate is to alter our predictions as we acquire more data. Or as John Maynard Keynes famously said, “When the facts change, I change my mind.“ Business people and politicians, doctors and lawyers, all make predictions about products, people and social policies. Those who don’t adjust and improve their results often find themselves out of power, or out of a job. Investors make predictions. The successful ones acknowledge when they’re wrong and sell their mistakes.

     One thing to remember is that the consensus is usually right. Many people make predictions about sports, politics or the weather. Those predictions converge as people test out their theories and seek the truth by factoring in more evidence. This explains why the general consensus about the outcome of any event is typically a better prediction than any one person's view, and why the outlier prediction is usually less accurate.

     So if you're a betting person, bet on the New England Patriots over the Jacksonville Jaguars. And (even though I'm now an Eagles fan) the Vikings over the Eagles . . . although that one is less certain.

     And what about politics? Trump's approval rating is currently 39.5%, vs. 55.5% who disapprove of his actions. And the president's party typically loses at least a few Congressional seats in the mid-term election. So FiveThirtyEight says it's likely the Democrats will pick up 30-some seats in the House of Representatives in the November election and take control of the House. But because many more Democrats than Republicans are up for re-election in the Senate, the site gives only about a 25% chance that the Democrats will take over the Senate.

     However, take this all with a grain of salt. According to Silver, despite all our advances in technology, the affairs of men are not becoming more predictable, because those very advances also bring us a more complex society. But at least we can get a better grip on our own world -- if we recognize our own biases, focus on what's important, avoid the trap of overconfidence, and revise our views as you encounter new information.

11 comments:

Tabor said...

Plus lots of things can happen before the prediction..someone breaks a leg, someone gets arrested...even someone gets a really bad head cold.

Kathy @ SMART Living 365.com said...

Hi Tom! I had forgotten about the Nate Silver's site. I think all of us LOVE the idea of predictions because we all want to know what happens before it happens--as a sort of "control" thing. Very few of us are comfortable with the uncertainty of life so far too often we will listen to anyone that tells us what we want to hear. I was unfortunately in that group in the last election and #1 didn't take the threat seriously enough and #2 was in denial about the number of people in our country that thought radically different from me. Boy was my "prediction" wrong. You offer some really great insights into remembering that it is likely just better to get comfortable with uncertainty than it is to try to predict anything. Hey, that sounds like a provocative blog post! :-) ~Kathy

Anonymous said...

Tom Brady hurt his hand so badly that it bled. Don't think the Patriots are going to win.

Olga Hebert said...

I like to focus on the moment and hope for the best. And I spend no money betting on sports so I don't pay attention to those predictions.

DJan said...

There are so many variables and factors between us and the November elections that I wouldn't be willing to predict anything. I was astounded at the outcome of one of last week's football games and wouldn't want to predict anything there, either. It's fun to read about the possibilities and then sit back and take it all in. :-)

Jono said...

I live in Minnesota, but grew up near Philadelphia. I will be torn between the Vikings and the Eagles, but I will be tired from skiing so I might fall asleep during the game. Predictions are fun, but I will wake up to reality.
Living in a sometimes severe climate makes weather predictions more useful, but often it is referred to as the "anxiety report".

Barbara said...

I was really excited until I got to 25% chance for Senate. Hahaha. Wishing for greener grasses but equally afraid of what is on the other side.

David @ iretiredyoung said...

"When the facts change, I change my mind", I like that, so thanks for educating me on that useful piece of trivia.

Perhaps our politicians need educating on it too. Too many of them seem to go by "when it seems that I should change my mind, don't, just change the facts".

Sue Loncaric said...

I agree about the 'ton of information' around and most of it being a distraction. I get so many emails that I don't remember subscribing for so I've been culling lately

Rebecca Olkowski said...

Nate Silver is a very wise man. Facts are so important and we're getting a lot of hype these days. And when facts change, we have to go along with them and not stubbornly stick to a position that will not do anyone any good. However, I'm not seeing much sense in this current government. I want that bad TV show to be over NOW!

still the lucky few said...

Funny that you should mention earthquakes. I was awakened by a neighbor passing on a government warning about a tsunami that might have happened as a result of the earthquake in Alaska this morning. At the time, no one knew whether or not it would occur, so we all went through a an anxious time until the all clear. I guess that would qualify as a guess, not a forecast, and certainly not a prediction!