6 ms·

The classic joke about this is that the inverted yield curve has predicted 12 of the last 7 recessions.

by JackFr 4y ago

spywaregorilla 4y ago
I find it funny that this joke seems to imply getting 5/12 false positives means that it's an obviously bad model.
- rco8786 4y ago
  I'm not a statistician, but if something is ~50% accurate in predicting a recession does that not make it roughly equivalent to a coin flip?
  - spywaregorilla 4y ago
    It's a big topic. But 5/12 false positives tells you nothing about accuracy. You also need to measure the number of true negatives and false negatives and what not. Accuracy tends to be worthless for most use cases when the event being predicted is rare. If you're predicting a 1 in a million event always predicting NO gives you a 99.9999% accurate model. Many medical tests are 99%+ accurate, but the false positive rate, meaning the probability that you don't have the disease given a false positive test is still extremely high. Like 90%+. Bayes law fucks us all.
    - MikeDelta 4y ago
      For those interested, a bit more background on false positives of rare events https://math.hmc.edu/funfacts/medical-tests-and-bayes-theorem/ https://math.hmc.edu/funfacts/medical-tests-and-bayes-theore...
    - kmonsen 4y ago
      Medical tests are often designed that way. For example cheap/quick hiv tests have a low false negative and a high false positive. They are still useful, you filter out most people safely and the ones with a positive test can take a more expensive test to check.
      - spywaregorilla 4y ago
        Yes, but also no. If your test only flags a false positive 1 in a million times, searching for a disease that affects 1 in 100 million people, you'll get a ratio of 100:1 false positives. Still very useful as you explain, but I think it's misleading to imply that's what they're aspiring to. It's hard to make a test that never returns false positives.
        kmonsen 4y ago
        I don’t disagree with you, merely said that for some reason it was possible to make a cheaper and quicker HIV test that has a high false positive and a low false negative. I have myself tested positive twice without actually being positive when being deployed with the army, so agree on all your points that this is not great and not an intended goal,. Just what we get when we try to make the cheapest possible test today.
  - Nowado 4y ago
    I can't tell how serious, but just in case. Probability of recession ('how often do you check?' question aside) is fairly low. If you can guess what specific number comes up on a dice roll 50% of the time, you're good at predicting dice rolls.
  - InefficientRed 4y ago
    > does that not make it roughly equivalent to a coin flip? No. Intuition: predicting the outcome of a coin flip correctly 50% of the time is unimpressive, but predicting the outcome of a D20 dice roll correctly 50% of the time is incredibly impressive.
    - rco8786 4y ago
      In this case the outcome is binary though, "Recession" or "No recession"
      - heavenlyblue 4y ago
        It's not binary, it's "is the recession going to happen in the next few months/years", so the prediction is a number. More like D20 in one of the neighbour threads. But not necessarily a D20, could be a D6 so less impressive.
      - s1artibartfast 4y ago
        Rollong a 20 vs not 20 is binary, but that doesn't mean it happens 50% of the time. Recession or not is binary, but that doesn't mean we have a 50% chance of entering one on a given day.
      - satellite2 4y ago
        Over thousands of periods. And each time the prediction was no the outcome was no, and among the few times the predictions was yes it happened 50% of the time.
        InefficientRed 4y ago
        Recessions are forecast on a quarterly basis, so not thousands, but more than 20 between each recession (typically, historically). That's why I chose a D20 -- out of coin/dice/D6/D20/Roulette, it's the RNG that's most reasonably close to the number of quarters between recessions.
        4y ago
  - PaulHoule 4y ago
    "Precision" is the right word, that's the probability that you identified a recession but there wasn't a recession. You can get very high accuracy (more like 95%) by predicting that there will not be a recession because recessions are less common than expansions. An indicator that flashes occasionally but it even if it wrong half of the time (you do the coin flip after the warning) it is giving useful information about an unusual event.
  - ellis-bell 4y ago
    it's a _necessary_ but _not sufficient_ condition for a recession. so it does provide you information. if the yield curve does not invert, it is unlikely there will be a recession.
  - s1artibartfast 4y ago
    It really depends. If you count 100 times where the yield was not inverted and no recession was predicted, the odds get a lot better.
  - raziel2701 4y ago
    What type of bet you make with the market matters a lot. If your play is very convex and it gives you the opportunity to risk $1 to make $10 then that's a worthwhile bet to make provided that losing $1 10 times doesn't wipe you out. Since market crashes tend to be violent and volatile there are instruments out there that benefit from higher volatility and can give you 100x returns. So when you combine a 5/12 accuracy indicator with a play that is low probability, little fee to entry, but huge reward you have a decent strategy.
  - aqme28 4y ago
    Only if the probability of the true positive is 50%. If I had a model that told me with 50% certainty that a black swan event was about to occur, that would be pretty valuable.
  - 55555 4y ago
    If you flipped a coin every day to determine if a recession started, you'd have a way worse record than 50/50.
    - aqme28 4y ago
      Well if your coin says "no recession" on one side and "recession" on the other, you'd get 50/50.
  - marcosdumay 4y ago
    Only if you throw it twice as many times as there are recessions. if you throw a coin every day, and it's 50% accurate in predicting recessions that only happen every few years, that's a hell of a signal.
rubyfan 4y ago
haha, I had to read that three times to get the joke.
kmonsen 4y ago
One thing that make that statement less impactful is that we now have tools to prevent recessions. So maybe in those five a recession were coming but correct action was taken and it was all good.
- lazybreather 4y ago
  "In economics a prediction itself can alter the object of the prediction. Hence, for certain kinds of ecomomic phenomenon, forecasting can be a logical impossibility." - Kaushik Basu. I think recession definitely falls under this category. And calling out a recession while we are already in it is not really a prediction.
- adamsmith143 4y ago
  >One thing that make that statement less impactful is that we now have tools to prevent recessions. Such as? We seem to be pulling all possible levers and are still barreling into a recession at full speed.
  - kmonsen 4y ago
    What? This is a created recession as I see it. If we wanted to avoid this recession we would reduce the loan rate and increase the money supply. Not saying that would be smart.
  - dragonwriter 4y ago
    > We seem to be pulling all possible levers and are still barreling into a recession at full speed. The Fed is pulling fairly hard (but far from maximally hard, because there is considerable concern about policy overshoot) on the anti-inflation monetary policy levers. Those are also the ones that cause, rather than fight, recessions. They are doing this because pulling hard on the anti-recession levers due to the hard and fast COVID recession lead to an equally hard and fast rebound with skyrocketing inflation. Congress is basically sitting on its hands on major fiscal policy levers, having returned to a basic neutral stance after fairly heavy anti-recession stimulus during the COVID recession. (If we really wanted to manage inflation while avoiding recession, we’d probably want Congress taking more targeted anti-inflation fiscal action aimed at the specific sectors driving overall inflation, so that the Fed could take a lighter hand on broad-focus anti-stimulative measures; if we just wanted to avoid recession in the near term period, we’d focus on stimulus and damn the torpedoes of inflation; but I don't think that would be wise.) We are very, very far from pulling all possible levers to prevent a recession.
throw0101a 4y ago
> The classic joke about this is that the inverted yield curve has predicted 12 of the last 7 recessions. That is not the classic joke. First off, inverted yield curves has accurately predicted recessions without false positives. Look up Campbell R. Harvey, who first published on this phenomenon in his dissertation: * https://today.duke.edu/2019/07/its-official-yield-curve-triggered-does-recession-loom-horizon https://today.duke.edu/2019/07/its-official-yield-curve-trig... Interview from 2019: * https://www.youtube.com/watch?v=9sb1byR8Zx0 https://www.youtube.com/watch?v=9sb1byR8Zx0 Its record is 7 for 7, with no false signals, using data since 1950. Of course people weren't looking at it closely until post-2008, so now it could (as mentioned in the interview @4m50s) become part of a feedback mechanism. Second, the actual joke by economist Paul Samuelson (who wrote "the" textbook on economics) was about Wall Street: > To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.[18] * https://en.wikipedia.org/wiki/Paul_Samuelson#Aphorisms_and_quotations https://en.wikipedia.org/wiki/Paul_Samuelson#Aphorisms_and_q...

The classic joke about this is that the inverted yield curve has predicted 12 of the last 7 recessions.

by JackFr 4y ago

The classic joke about this is that the inverted yield curve has predicted 12 of the last 7 recessions.

spywaregorilla 4y ago

I find it funny that this joke seems to imply getting 5/12 false positives means that it's an obviously bad model.

rco8786 4y ago
I'm not a statistician, but if something is ~50% accurate in predicting a recession does that not make it roughly equivalent to a coin flip?
- spywaregorilla 4y ago
  It's a big topic. But 5/12 false positives tells you nothing about accuracy. You also need to measure the number of true negatives and false negatives and what not. Accuracy tends to be worthless for most use cases when the event being predicted is rare. If you're predicting a 1 in a million event always predicting NO gives you a 99.9999% accurate model. Many medical tests are 99%+ accurate, but the false positive rate, meaning the probability that you don't have the disease given a false positive test is still extremely high. Like 90%+. Bayes law fucks us all.
  - MikeDelta 4y ago
    For those interested, a bit more background on false positives of rare events https://math.hmc.edu/funfacts/medical-tests-and-bayes-theorem/ https://math.hmc.edu/funfacts/medical-tests-and-bayes-theore...
  - kmonsen 4y ago
    Medical tests are often designed that way. For example cheap/quick hiv tests have a low false negative and a high false positive. They are still useful, you filter out most people safely and the ones with a positive test can take a more expensive test to check.
    - spywaregorilla 4y ago
      Yes, but also no. If your test only flags a false positive 1 in a million times, searching for a disease that affects 1 in 100 million people, you'll get a ratio of 100:1 false positives. Still very useful as you explain, but I think it's misleading to imply that's what they're aspiring to. It's hard to make a test that never returns false positives.
      - kmonsen 4y ago
        I don’t disagree with you, merely said that for some reason it was possible to make a cheaper and quicker HIV test that has a high false positive and a low false negative. I have myself tested positive twice without actually being positive when being deployed with the army, so agree on all your points that this is not great and not an intended goal,. Just what we get when we try to make the cheapest possible test today.
- Nowado 4y ago
  I can't tell how serious, but just in case. Probability of recession ('how often do you check?' question aside) is fairly low. If you can guess what specific number comes up on a dice roll 50% of the time, you're good at predicting dice rolls.
- InefficientRed 4y ago
  > does that not make it roughly equivalent to a coin flip? No. Intuition: predicting the outcome of a coin flip correctly 50% of the time is unimpressive, but predicting the outcome of a D20 dice roll correctly 50% of the time is incredibly impressive.
  - rco8786 4y ago
    In this case the outcome is binary though, "Recession" or "No recession"
    - heavenlyblue 4y ago
      It's not binary, it's "is the recession going to happen in the next few months/years", so the prediction is a number. More like D20 in one of the neighbour threads. But not necessarily a D20, could be a D6 so less impressive.
    - s1artibartfast 4y ago
      Rollong a 20 vs not 20 is binary, but that doesn't mean it happens 50% of the time. Recession or not is binary, but that doesn't mean we have a 50% chance of entering one on a given day.
    - satellite2 4y ago
      Over thousands of periods. And each time the prediction was no the outcome was no, and among the few times the predictions was yes it happened 50% of the time.
      - InefficientRed 4y ago
        Recessions are forecast on a quarterly basis, so not thousands, but more than 20 between each recession (typically, historically). That's why I chose a D20 -- out of coin/dice/D6/D20/Roulette, it's the RNG that's most reasonably close to the number of quarters between recessions.
        4y ago
- PaulHoule 4y ago
  "Precision" is the right word, that's the probability that you identified a recession but there wasn't a recession. You can get very high accuracy (more like 95%) by predicting that there will not be a recession because recessions are less common than expansions. An indicator that flashes occasionally but it even if it wrong half of the time (you do the coin flip after the warning) it is giving useful information about an unusual event.
- ellis-bell 4y ago
  it's a _necessary_ but _not sufficient_ condition for a recession. so it does provide you information. if the yield curve does not invert, it is unlikely there will be a recession.
- s1artibartfast 4y ago
  It really depends. If you count 100 times where the yield was not inverted and no recession was predicted, the odds get a lot better.
- raziel2701 4y ago
  What type of bet you make with the market matters a lot. If your play is very convex and it gives you the opportunity to risk $1 to make $10 then that's a worthwhile bet to make provided that losing $1 10 times doesn't wipe you out. Since market crashes tend to be violent and volatile there are instruments out there that benefit from higher volatility and can give you 100x returns. So when you combine a 5/12 accuracy indicator with a play that is low probability, little fee to entry, but huge reward you have a decent strategy.
- aqme28 4y ago
  Only if the probability of the true positive is 50%. If I had a model that told me with 50% certainty that a black swan event was about to occur, that would be pretty valuable.
- 55555 4y ago
  If you flipped a coin every day to determine if a recession started, you'd have a way worse record than 50/50.
  - aqme28 4y ago
    Well if your coin says "no recession" on one side and "recession" on the other, you'd get 50/50.
- marcosdumay 4y ago
  Only if you throw it twice as many times as there are recessions. if you throw a coin every day, and it's 50% accurate in predicting recessions that only happen every few years, that's a hell of a signal.

rubyfan 4y ago

haha, I had to read that three times to get the joke.

kmonsen 4y ago

One thing that make that statement less impactful is that we now have tools to prevent recessions. So maybe in those five a recession were coming but correct action was taken and it was all good.

lazybreather 4y ago
"In economics a prediction itself can alter the object of the prediction. Hence, for certain kinds of ecomomic phenomenon, forecasting can be a logical impossibility." - Kaushik Basu. I think recession definitely falls under this category. And calling out a recession while we are already in it is not really a prediction.
adamsmith143 4y ago
>One thing that make that statement less impactful is that we now have tools to prevent recessions. Such as? We seem to be pulling all possible levers and are still barreling into a recession at full speed.
- kmonsen 4y ago
  What? This is a created recession as I see it. If we wanted to avoid this recession we would reduce the loan rate and increase the money supply. Not saying that would be smart.
- dragonwriter 4y ago
  > We seem to be pulling all possible levers and are still barreling into a recession at full speed. The Fed is pulling fairly hard (but far from maximally hard, because there is considerable concern about policy overshoot) on the anti-inflation monetary policy levers. Those are also the ones that cause, rather than fight, recessions. They are doing this because pulling hard on the anti-recession levers due to the hard and fast COVID recession lead to an equally hard and fast rebound with skyrocketing inflation. Congress is basically sitting on its hands on major fiscal policy levers, having returned to a basic neutral stance after fairly heavy anti-recession stimulus during the COVID recession. (If we really wanted to manage inflation while avoiding recession, we’d probably want Congress taking more targeted anti-inflation fiscal action aimed at the specific sectors driving overall inflation, so that the Fed could take a lighter hand on broad-focus anti-stimulative measures; if we just wanted to avoid recession in the near term period, we’d focus on stimulus and damn the torpedoes of inflation; but I don't think that would be wise.) We are very, very far from pulling all possible levers to prevent a recession.

throw0101a 4y ago

> The classic joke about this is that the inverted yield curve has predicted 12 of the last 7 recessions. That is not the classic joke. First off, inverted yield curves has accurately predicted recessions without false positives. Look up Campbell R. Harvey, who first published on this phenomenon in his dissertation: * https://today.duke.edu/2019/07/its-official-yield-curve-triggered-does-recession-loom-horizon https://today.duke.edu/2019/07/its-official-yield-curve-trig... Interview from 2019: * https://www.youtube.com/watch?v=9sb1byR8Zx0 https://www.youtube.com/watch?v=9sb1byR8Zx0 Its record is 7 for 7, with no false signals, using data since 1950. Of course people weren't looking at it closely until post-2008, so now it could (as mentioned in the interview @4m50s) become part of a feedback mechanism. Second, the actual joke by economist Paul Samuelson (who wrote "the" textbook on economics) was about Wall Street: > To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.[18] * https://en.wikipedia.org/wiki/Paul_Samuelson#Aphorisms_and_quotations https://en.wikipedia.org/wiki/Paul_Samuelson#Aphorisms_and_q...