In science, dubious forecasts are more likely to be exposed – and the truth is more likely to prevail. In politics, a domain in which the truth enjoys no privileged status, it’s anybody’s guess.
One conceit of economics is that markets as a whole can perform fairly rationally, even if many of the participants within them are irrational. But irrational behavior in the markets may result precisely because individuals are responding rationally according to their incentives.
We are undoubtedly living with many delusions that we do not even realize.
We should neither worship at the altar of technology nor be frightened by it.
The leap is into the Bayesian way of thinking about prediction and probability.
The alchemy that the ratings agencies performed was to spin uncertainty into what looked and felt like risk.
We may, without even realizing it, work backward to generate persuasive-sounding theories that rationalize them, and these will often fool our friends and colleagues as well as ourselves.
Where our enemies will strike us is predictable: it’s where we least expect them to.
Most statistical models are built on the notion that there are independent variables and dependent variables, inputs and outputs, and they can be kept pretty much separate from one another.39 When it comes to the economy, they are all lumped together in one hot mess.
It’s hard enough to know where the economy is going. But it’s much, much harder if you don’t know where it is to begin with.
Language, for instance, is a type of model, an approximation that we use to communicate with one another.
Like a baseball umpire, an intelligence analyst risks being blamed when something goes wrong but receives little notice when she does her job well.
Alvin Toffler, writing in the book Future Shock in 1970, predicted some of the consequences of what he called “information overload.” He thought our defense mechanism would be to simplify the world in ways that confirmed our biases, even as the world itself was growing more diverse and more complex.42.
The human brain is quite remarkable; it can store perhaps three terabytes of information.
An American home has not, historically speaking, been a lucrative investment. In fact, according to an index developed by Robert Shiller and his colleague Karl Case, the market price of an American home has barely increased at all over the long run. After adjusting for inflation, a $10,000 investment made in a home in 1896 would be worth just $10,600 in 1996. The rate of return had been less in a century than the stock market typically produces in a single year.
Things like Google search traffic patterns, for instance, can serve as leading indicators for economic data series like unemployment.
So we should have some sympathy for economic forecasters.50 It’s hard enough to know where the economy is going. But it’s much, much harder if you don’t know where it is to begin with.
The daily consumption in South Korea, which has a fairly meat-heavy diet, is about 3,070 calories per person per day, slightly above the world average. However, the obesity rate there is only about 3 percent. The Pacific island nation of Nauru, by contrast, consumes about as many calories as South Korea per day,6 but the obsesity rate there is 79 percent.
That meant that for every dollar that someone was willing to put in a mortgage, Wall Street was making almost $50 worth of bets on the side.
Bayes’s theorem deals with epistemological uncertainty – the limits of our knowledge.