ENTRIES TAGGED "finance"

This piece originally appeared on Mathbabe. We’re also including Jordan Ellenberg’s counter-point to Cathy’s original post as well as Cathy’s response to Jordan. All of these pieces are republished with permission.

I just finished reading Nate Silver’s newish book, The Signal and the Noise: Why so many predictions fail – but some don’t.

The good news

First off, let me say this: I’m very happy that people are reading a book on modeling in such huge numbers – it’s currently eighth on the New York Times best seller list and it’s been on the list for nine weeks. This means people are starting to really care about modeling, both how it can help us remove biases to clarify reality and how it can institutionalize those same biases and go bad.

As a modeler myself, I am extremely concerned about how models affect the public, so the book’s success is wonderful news. The first step to get people to think critically about something is to get them to think about it at all.

Moreover, the book serves as a soft introduction to some of the issues surrounding modeling. Silver has a knack for explaining things in plain English. While he only goes so far, this is reasonable considering his audience. And he doesn’t dumb the math down.

In particular, Silver does a nice job of explaining Bayes’ Theorem. (If you don’t know what Bayes’ Theorem is, just focus on how Silver uses it in his version of Bayesian modeling: namely, as a way of adjusting your estimate of the probability of an event as you collect more information. You might think infidelity is rare, for example, but after a quick poll of your friends and a quick Google search you might have collected enough information to reexamine and revise your estimates.)

The bad news

Having said all that, I have major problems with this book and what it claims to explain. In fact, I’m angry.

It would be reasonable for Silver to tell us about his baseball models, which he does. It would be reasonable for him to tell us about political polling and how he uses weights on different polls to combine them to get a better overall poll. He does this as well. He also interviews a bunch of people who model in other fields, like meteorology and earthquake prediction, which is fine, albeit superficial.

What is not reasonable, however, is for Silver to claim to understand how the financial crisis was a result of a few inaccurate models, and how medical research need only switch from being frequentist to being Bayesian to become more accurate. Read more…