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I believe he's making a slightly more subtle point. It's not just that the forecasts are swinging too much, it's that they're swinging too much too early. Cons
by darawk 8y ago
I believe he's making a slightly more subtle point. It's not just that the forecasts are swinging too much, it's that they're swinging too much too early.
Consider an option on a stock (which is the analogy Taleb is making here). If you buy a 1 year call option on AAPL and tomorrow they announce that they beat earnings by 10%, that's not a huge deal for you. If on the other hand, you owned a 1-week expiration call, it is a big deal for you. That is, your prediction should be less sensitive to changes in environment the further out it is.
I believe he is somehow formalizing this statement, and then showing that Nate Silver's forecasts violate it, but I too don't fully understand his formalism.
- OscarCunningham 8y agoI think that Taleb's problem is that he thinks all the uncertainty in Silver's model comes from the fact that people might change their minds about who to vote for. This is why Taleb can't make a model that fits Silver's forecasts. Silver could only be confident early on if he knew that people weren't going to change their minds much. But if people don't change their minds much then Silver's forecast shouldn't fluctuate much as time passes. Alternatively, if the forecast fluctuates a lot, it must be because lots of people are changing their minds. But then Silver shouldn't have been so confident to begin with! But in fact the uncertainty in Silver's model isn't (wholy) caused by the possibility that people change their minds. It's mostly caused by the possibility of polling error. As we approach the election people have less time to change their minds, but the possibility of polling error doesn't change. This why Taleb can't create a model under which Silver's forecasts are rational; he's not taking into account polling error.
- dmurray 8y agoNo, it's mostly caused by people changing their minds on who to vote for (or whether to vote). That's why the estimates move around a lot when there is news affecting the election, like the given example of Comey re-opening the Clinton investigation.
- OscarCunningham 8y agoThere's still also a lot of uncertainty caused by polling error. You can tell by comparing the final polls to the actual results.
- darawk 8y agoThose things may be true...but how does that relate to the issue Taleb is highlighting? That the forecast is overly volatile with respect to arbitrage pricing theory.
- objektif 8y agoThat would be only true if the thing you are forecasting becomes more sensitive to changes in the environment as time passes. It is true in your option example but not entirely true for elections.