4 ms·

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.

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.