At this season it is customary to look back on the achievements of the year that is past and to consider what may unfold in the year to come. Nate Silver, the young statistician who became an unexpected hero of 2012, is relevant to both exercises.
Many experts thought the American election too close to call but Mr Silver, though reviled by the Republicans, insisted that Barack Obama was likely to be comfortably re-elected. His prediction received attention because his forecasts of results four years earlier had proved very accurate. When Mr Silver was again proved right, his publisher cashed in and his book on prediction, The Signal and the Noise, became a bestseller.
There is no crystal ball behind Mr Silver’s success: just diligent work, obtaining disaggregated polling data, and assembling them with a sceptical mind that is well-informed about qualitative as well as quantitative factors relevant to the results. However, Mr Silver’s care, and his reliability, put popular pundits to shame. He exemplifies – and in his book reiterates – the distinction between hedgehog and fox made by the political scientist Philip Tetlock (following Isaiah Berlin, following Tolstoy, following Erasmus, following Archilochus). The hedgehog knows one big thing, the fox many little things. The hedgehog attracts public attention, but the fox is better at forecasting.
Predicting election results is relatively easy. The problem is well-defined – the candidates are known, the process of choice defined in legislation, the result a matter of public record. The issues lend themselves to probabilistic reasoning – the mathematical properties of sampling populations are well understood. Much the same is true of baseball statistics and poker, two other issues on which Mr Silver claims particular insight. Weather forecasting is harder, but we know whether it is raining or not, have extensive data sets, and some – if inadequate – understanding of the processes by which clouds form and winds blow. But most of the problems we face in business and finance are ill-defined and open-ended. We often do not really know the answers even after the event. We cannot envisage the full range of possible outcomes, or the options available. Nassim Nicholas Taleb famously characterised this world as populated by “black swans”, while Donald Rumsfeld mused on “unknown unknowns”.
People crave specific knowledge of the evolution of complex systems, paying good money for the services of clairvoyants and economic forecasters. But such knowledge is rarely available. Nor, even if it were available, would it often be useful. Physicists studying sport have established that many fieldsmen are very good at catching balls, but bad at answering the question: “Where in the park will the ball land?” Good players don’t forecast the future, but adapt to it. That is the origin of the saying “keep your eye on the ball”.
As complex systems go, the interaction between the ball in flight and the moving fieldsman is still relatively simple. In principle, most of the knowledge needed to compute trajectories and devise an optimal strategy is available: we just don’t have the instruments or the time for analysis and computation. More often, the relevant information is not even potentially knowable. The skill of the sports player is not the result of superior knowledge of the future, but of an ability to employ and execute good strategies for making decisions in a complex and changing world. The same qualities are characteristic of the successful executive. Managers who know the future are more often dangerous fools than great visionaries.
Most people who hire fortune tellers have the good sense to treat their prognostications lightly. The activity is casual fun, its value – if any – is as provocation to think carefully about the present rather than a measure of gaining knowledge about the future. Good predictions may be available in structured, well-ordered, situations – but, even then, forecasts are properly conditional or probabilistic. There are few certainties about the future: but one is that hedgehogs who make confident statements on the basis of some universal theory will be as persistently misleading counsellors in the future as in the past. And that the foxes, like Mr Silver, who scramble everywhere for scraps of information will provide better, if more nuanced, advice.