# The Signal and the Noise ## Metadata * Author: [Nate Silver](https://www.amazon.comundefined) * ASIN: B007V65R54 * Reference: https://www.amazon.com/dp/B007V65R54 * [Kindle link](kindle://book?action=open&asin=B007V65R54) ## Highlights It might have been fine had the potential for error in their forecasts been linear and arithmetic. But leverage, or investments financed by debt, can make the error in a forecast compound many times over, and introduces the potential of highly geometric and nonlinear mistakes. — location: [863](kindle://book?action=open&asin=B007V65R54&location=863) ^ref-18972 --- Risk, as first articulated by the economist Frank H. Knight in 1921,45 is something that you can put a price on. Say that you’ll win a poker hand unless your opponent draws to an inside straight: the chances of that happening are exactly 1 chance in 11.46 This is risk. It is not pleasant when you take a “bad beat” in poker, but at least you know the odds of it and can account for it ahead of time. In the long run, you’ll make a profit from your opponents making desperate draws with insufficient odds. Uncertainty, on the other hand, is risk that is hard to measure. You might have some vague awareness of the demons lurking out there. You might even be acutely concerned about them. But you have no real idea how many of them there are or when they might strike. Your back-of-the-envelope estimate might be off by a factor of 100 or by a factor of 1,000; there is no good way to know. This is uncertainty. Risk greases the wheels of a free-market economy; uncertainty grinds them to a halt. — location: [870](kindle://book?action=open&asin=B007V65R54&location=870) ^ref-52720 --- when a financial company dies, it can continue to haunt the economy through an afterlife of unmet obligations. If Lehman Brothers was no longer able to pay out on the losing bets that it had made, this meant that somebody else suddenly had a huge hole in his portfolio. Their problems, in turn, might affect yet other companies, with the effects cascading throughout the financial system. — location: [1001](kindle://book?action=open&asin=B007V65R54&location=1001) ^ref-336 --- “It was a self-denying prophecy,” Summers told me of the financial crisis. “Everybody leveraged substantially, and when everybody leverages substantially, there’s substantial fragility, and their complacency proves to be unwarranted.” — location: [1014](kindle://book?action=open&asin=B007V65R54&location=1014) ^ref-38021 --- Summers thinks of the American economy as consisting of a series of feedback loops. One simple feedback is between supply and demand. Imagine that you are running a lemonade stand.83 You lower the price of lemonade and sales go up; raise it and they go down. If you’re making lots of profit because it’s 100 degrees outside and you’re the only lemonade stand on the block, the annoying kid across the street opens his own lemonade stand and undercuts your price. Supply and demand is an example of a negative feedback: as prices go up, sales go down. Despite their name, negative feedbacks are a good thing for a market economy. Imagine if the opposite were true and as prices went up, sales went up. You raise the price of lemonade from 25 cents to $2.50—but instead of declining, sales double.84 Now you raise the price from $2.50 to $25 and they double again. Eventually, you’re charging $46,000 for a glass of lemonade—the average income in the United States each year—and all 300 million Americans are lined up around the block to get their fix. This would be an example of a positive feedback. And while it might seem pretty cool at first, you’d soon discover that everyone in the country had gone broke on lemonade. There would be nobody left to manufacture all the video games you were hoping to buy with your profits. Usually, in Summers’s view, negative feedbacks predominate in the American economy, behaving as a sort of thermostat that prevents it from going into recession or becoming overheated. Summers thinks one of the most important feedbacks is between what he calls fear and greed. Some investors have little appetite for risk and some have plenty, but their preferences balance out: if the price of a stock goes down because a company’s financial position deteriorates, the fearful investor sells his shares to a greedy one who is hoping to bottom-feed. Greed and fear are volatile quantities, however, and the balance can get out of whack. When there is an excess of greed in the system, there is a bubble. When there is an excess of fear, there is a panic. — location: [1017](kindle://book?action=open&asin=B007V65R54&location=1017) ^ref-14720 --- Or say that you are considering buying another type of asset: a mortgage-backed security. This type of commodity may be even harder to value. But the more investors buy them—and the more the ratings agencies vouch for them—the more confidence you might have that they are safe and worthwhile investments. Hence, you have a positive feedback—and the potential for a bubble. A negative feedback did eventually rein in the housing market: there weren’t any Americans left who could afford homes at their current prices. For that matter, many Americans who had bought homes couldn’t really afford them in the first place, and soon their mortgages were underwater. But this was not until trillions of dollars in bets, highly leveraged and impossible to unwind without substantial damage to the economy, had been made on the premise that all the people buying these assets couldn’t possibly be wrong. “We had too much greed and too little fear,” Summers told me in 2009. “Now we have too much fear and too little greed.” — location: [1038](kindle://book?action=open&asin=B007V65R54&location=1038) ^ref-25159 --- Unless you are a fan of Tolstoy—or of flowery prose—you’ll have no particular reason to read Berlin’s essay. But the basic idea is that writers and thinkers can be divided into two broad categories: Hedgehogs are type A personalities who believe in Big Ideas—in governing principles about the world that behave as though they were physical laws and undergird virtually every interaction in society. Think Karl Marx and class struggle, or Sigmund Freud and the unconscious. Or Malcolm Gladwell and the “tipping point.” Foxes, on the other hand, are scrappy creatures who believe in a plethora of little ideas and in taking a multitude of approaches toward a problem. They tend to be more tolerant of nuance, uncertainty, complexity, and dissenting opinion. If hedgehogs are hunters, always looking out for the big kill, then foxes are gatherers. Foxes, Tetlock found, are considerably better at forecasting than hedgehogs. They had come closer to the mark on the Soviet Union, for instance. Rather than seeing the USSR in highly ideological terms—as an intrinsically “evil empire,” or as a relatively successful (and perhaps even admirable) example of a Marxist economic system—they instead saw it for what it was: an increasingly dysfunctional nation that was in danger of coming apart at the seams. Whereas the hedgehogs’ forecasts were barely any better than random chance, the foxes’ demonstrated predictive skill. — location: [1271](kindle://book?action=open&asin=B007V65R54&location=1271) ^ref-48654 --- FIGURE 2-2: ATTITUDES OF FOXES AND HEDGEHOGS — location: [1282](kindle://book?action=open&asin=B007V65R54&location=1282) ^ref-63950 ---