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It's not that we can't forecast heavy tailed processes -- it's just that the forecasts are used wrong. The appropriate layman's forecast of a recession within

by kqr 3y ago

It's not that we can't forecast heavy tailed processes -- it's just that the forecasts are used wrong. The appropriate layman's forecast of a recession within the next year is something like a constant 11 %. I'm willing to bet this outperforms most "predictions" out there. But! When people see that number they go, "right, so it's vastly more likely it does not happen" and then completely ignore the possibility. The problem is not in the probability, but in the failure to adequately assign a cost function to the less likely outcomes.

diab0lic 3y ago
> The appropriate layman's forecast of a recession within the next year is something like a constant 11 %. I'm willing to bet this outperforms most "predictions" out there. I think we agree here but the unspoken measure is the amount of uncertainty in each forecast. This is still a very inaccurate prediction compared to the collision detection system which nearly always gets it right. You hit the nail on the head in your last paragraph. Doing something useful doesn’t require an accurate prediction. I agree entirely that assigning an appropriate cost function and responding accordingly guides you to useful actions. Edit: Just discovered your blog through your profile. The topics look super relevant to my interests. Thank you for sharing your thoughts online, I’m looking forward to reading them!
- kqr 3y ago
  De Finetti used a different word to separate "prediction" (object-level, concrete outcome) from "prevision" (probabilistic statement). The first is often nonsensical, the latter useful. Alas, these are not widely understood words.
roenxi 3y ago
Thankyou for putting it eloquently. The other subtle problem is that people tend to ask silly questions. Maybe I've just been lucky so far, but the focus on recessions seems like a relic of the pre-1970s time when GDP correlated with wages. I'm not seeing why it matters so much these days. Interest rates are centrally planned, so it is a bit of a philosophical question to ask what it means to "forecast" them. Really it is more a question of politics than any reliable process and the answer is "lower than makes sense". The economy for the last 10 or 20 years looked like it is carrying a lot of value-destructive companies looking for an opportunity to collapse that were almost certainly related to cheap credit. Uber and WeWork spring to mind. US debt is accumulating in a way that would have been making people nervous for decades. The problem here isn't forecasting, it is money being corralled to purposes that consume more resources than get generated. Being unable to predict what the perturbation against trend will be in 12 months time doesn't seem useful, appears to be impossible and it is weird that people love to focus on it. There are much more serious things to keep an eye on.

by kqr 3y ago

diab0lic 3y ago

> The appropriate layman's forecast of a recession within the next year is something like a constant 11 %. I'm willing to bet this outperforms most "predictions" out there. I think we agree here but the unspoken measure is the amount of uncertainty in each forecast. This is still a very inaccurate prediction compared to the collision detection system which nearly always gets it right. You hit the nail on the head in your last paragraph. Doing something useful doesn’t require an accurate prediction. I agree entirely that assigning an appropriate cost function and responding accordingly guides you to useful actions. Edit: Just discovered your blog through your profile. The topics look super relevant to my interests. Thank you for sharing your thoughts online, I’m looking forward to reading them!

kqr 3y ago
De Finetti used a different word to separate "prediction" (object-level, concrete outcome) from "prevision" (probabilistic statement). The first is often nonsensical, the latter useful. Alas, these are not widely understood words.

roenxi 3y ago

Thankyou for putting it eloquently. The other subtle problem is that people tend to ask silly questions. Maybe I've just been lucky so far, but the focus on recessions seems like a relic of the pre-1970s time when GDP correlated with wages. I'm not seeing why it matters so much these days. Interest rates are centrally planned, so it is a bit of a philosophical question to ask what it means to "forecast" them. Really it is more a question of politics than any reliable process and the answer is "lower than makes sense". The economy for the last 10 or 20 years looked like it is carrying a lot of value-destructive companies looking for an opportunity to collapse that were almost certainly related to cheap credit. Uber and WeWork spring to mind. US debt is accumulating in a way that would have been making people nervous for decades. The problem here isn't forecasting, it is money being corralled to purposes that consume more resources than get generated. Being unable to predict what the perturbation against trend will be in 12 months time doesn't seem useful, appears to be impossible and it is weird that people love to focus on it. There are much more serious things to keep an eye on.