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20130623 Signals and Noises

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Nat Silver author of this book got his notoriety or even fame in very unusual way. He specializes in political predictions and his prediction proved to be highly correct in last few election cycles. Since my own political prediction were more often then not incorrect it make lots of sense for me to pay attention to what he has to say and he has a lot to say about art of forecasting and prediction overall.

First of all he gives a nice common sense definition of difference between forecast and prediction: Prediction is a definite and specific statement about what will happen whereas Forecast is a probabilistic statement about future.

Also there is a very nice discussion about risk versus uncertainty with Risk being a quantifiable representation of possible outcome whereas Uncertainty is unquantifiable. “Risk greases the wheels of free-market economy; uncertainty grinds them to a halt.”

Then Silver goes to review multiple areas of prediction and forecasting dedicating a separate chapter to many of them:
• Political forecasting with heavy accent of its failures as practiced by pundits and experts and documented by Tetlock in his book.
• Sports forecasting
• Weather Forecasting
• Earthquakes Forecasting
• Even Poker game review as exercise in forecasting and prediction

Out of all these reviews comes out a number of rules that makes predictions and forecasting more or less viable:
1. Think probabilistically
2. Keep changing forecast as soon as new data come in – it is a dynamic process
3. Look for consensus – aggregate of forecasts is usually 15 to 20% more accurate then the individual ones.
4. Beware Magic Bullet forecast – too much certainty based on historical record could hurt
5. Weighting Qualitative information
6. Do everything possible to control for bias – objectivity is material for good forecast and is very difficult to maintain
7. Avoid overfitting – mistake of perception of noise for a signal. Often happens when correlation is taken for causation.

There is also quite nicely intersection with Taleb’s Antifragility and Randomness notions – a nice discussion of nonlinearity of the future and role Chaos theory (this nice little butterfly which can cause a huge hurricane due to nonlinearity of cause) effect sequences.

There is also an important discussion on Self-fulfilling and Self-cancelling predictions that provides a good reason to try taking into account the impact of prediction itself. Everything that we do has impact on the future events.

Silver also goes into nice set of details about Bayesian statistical methods and successes and failures of computer models and overall computer versus human issues in prediction and / or forecast development.

Overall a very useful book for me.

20130616 The disappeared world we all came from

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There is the great difference between descriptions of hunter / gatherers life in this book and a zillion descriptions of such life in literature from Jean Jacques Rousseau to present time – the author actually knows what he is writing about. Jared Diamond spent years living in hunter / gatherers societies and collecting information so he is probably the last trustworthy witness of how these societies worked. The simple and obvious reason for this is that during his research’s duration starting from 1960 to the present day these societies disappeared for good so we are not going to have any witnesses of them in the future. It is too bad because our genetic makeup is pretty much defined by the process of evolution as individual members of such societies successful enough to pass their genes on to the next generation. Obviously the genes that were not consistent with mode of living in such society were filtered out by this process.

So let’s look at what his knowledge of such societies tells us about what we can or cannot do; what we can and cannot be in different areas of human life:

Territory – all hunter / gatherers are territorial creatures. They divide space between tribes and guard borders as much or actually much more vigilantly then nation states because their survival depends on it. This territoriality runs deep in our genes and it is just not possible to remove it whatever socialists / communists / utopists think about it. We’ll always divide world into bits and pieces of property that belong to somebody: individual, family, tribe, or government or, more precisely to individuals who are in control of these entities and therefore care about this property decreasing in proportion to decrease of level of control over this property.

Consequently the division of the world into property pieces leads to conflicts because of dynamic nature of the world, which is constantly breaks down whatever mutual agreements about division exist at any given moment. Since there is always a change in power and legitimacy balance, there is always change in property allocation: who owns / controls what and to what extent. This leads us to another important feature of our nature – we are very prone to use violence to get what we want. Fortunately we are also very prone to build images of future outcomes which make us very peaceful creatures if we expect to fail in achieving whatever we want to achieve either because of inevitable and forceful violent resistance, retaliation, or whatever else can cause this failure.

Actually it opened a proven way to achieve peace – inevitable and extremely severe retaliation in form of nuclear strike stopped total wars between big states in the middle of XX century. With expansion of electronic surveillance of everything and everybody which seems to be impossible to stop, it looks like we are well on the way to eliminate individual crimes except in the case of complete desperation when consequences are irrelevant for individual.

Another important feature of hunter / gatherer is what author defined as “Constructive paranoia” – cautious and careful approach to environment with main objective to avoid catastrophic outcome rather then achieve a significant gain. There is a wonderful discussion in this book about agricultural strategy of tribes when everybody works on a number of different plots (sometimes 7-10) in different areas to assure that at least some of them provide enough food to survive despite a high cost of moving from one plot to another. It is a wonderful sample of antifragility in stark contrast to fragility of recently expanded nation state societies which provide such examples as potato famine in Ireland, or Cultural Revolution in China, or socialism in Russia.

For me as convinced libertarian, one additional source of hope that comes from this book is discussion about treatment of children and old people in this society. With all multiple variations of such treatment one thing seems to be consistent across the board – self-sufficiency of individual within framework of the tribe. It means that individuals either children or old entitled to receive resource transfer from other people only on two conditions – they could not do without it and their survival has more upside then downside for the tribe survival. Since we did not get that far away in our background from hunters / gatherers, I would expect that genes of majority of individuals would switch to the mode of survival when decrease in quality of life due to parasitic bureaucracy will achieve the level unacceptable for them.

The final part of book dedicated to religion, language, health, and nutrition of hunter/gatherers. Curiously as much as all these areas distant from each other they have something in common – in natural environment they are provided in very small doses and as result our genes developed to grab all these things as much as possible and consume them without a limit.

As result the religious world view of hunter / gather which serves a valuable purpose to explain world and help to deal with it, but could be only supplemental activity not capable to provide for survival, becomes a full time business of expansion, often violent, of religious world view on other people. The necessity for hunter-gatherer, member of a small tribe to speak several languages in order to communicate with members of other tribes become intellectual indulgence in symbolic arts of literature and entertainment. The health – death and life issue for hunter-gatherer, becomes an unhealthy obsession with unnecessary treatment for non-existing deceases for influent member of our society. By the same pattern the sweet and fancy food rarely available in small quantity in natural environment becomes easily available in unlimited quantities leading to obesity and early death.

I personally have no doubt that humanity will survive either via traditional way through elimination of individuals, whose genes are too much prone either to religious fanaticism or food overindulgence, or via less traditional and more human way of education and prevention of excesses.

20130609 Antifragile

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An interesting take on the world as it exists with non-trivial philosophical approach are presented in this book. I found it very consistent with my own believes and experiences.

The most important part of this approach is acceptance of the world as a given set of material substances and all events in this world as pretty much random and unpredictable sequences with no real meaning and / or objective behind it. It is not really important if there is something supernatural behind all of this or not because we cannot comprehend it anyway. My personal believes is simple – there is nothing to comprehend.

So in this unpredictable world filled with random events when in vast majority of cases the previous experience does not allow to predict future events, all systems from simple to complex created by humans or by nature have 3 levels of survivability status – Fragility, Robustness, and Antifragility. Fragility level is a condition of the system when unexpected changes are easily capable to destroy the system, Robustness level is a condition when system is capable to continue as it is despite significant changes occurred outside, and Antifragility is a condition of the system when it can change itself and self improve in response to changes.

Not surprisingly it comes down to difference between man made mechanical, chemical, or organizational systems and evolution made organic systems. A simple example of these notions would be a vessel to collect and keep water. It could be a glass bottle, a plastic container, or a leave of a plant. Obviously the glass bottle is fragile. It would break and spill all water if dropped on the hard floor. The plastic container is robust and will not break, but it would not change either. The plant’s leaves would change if not right away, then over time via process of evolution. So if we put up these three different containers with objective to collect water for a very long period of time the glass bottle will probably not survive strong wind or earthquake. The plastic bottle being robust would survive, but it would always collect water from the same area and always to the amount of its volume. The plant however would change from generation to generation and if climate become to be drier, it would expand its leaves to collect water from wider area. If climate changed to be wet, it could change form of leaves develop them into something quite different like pine needles to take advantage of abundance of water.

There is a very interesting discussion of this idea in application to human society with convincing argument that society build on libertarian market oriented principles with local democratic form of government is inherently superior to large scale bureaucratic state even if bureaucracy is limited by relatively democratic form. In turn even big bureaucratic, but at least somewhat democratic state with some level of rule of law is greatly superior to authoritarian state with level of fragility going up dramatically from local democracy to bureaucratic democracy to autocracy.

There is also an interesting discussion about system / subsystem relationship when subsystem, for example an individual is necessarily fragile in order to provide for high level of Antifragility for the system as whole – society this individual belongs to.

The book is also provides an interesting insight into human organizations from firms to society as whole depending on its setup for positive and negative feedbacks. In terms of this book it is treated as transfer of fragility from one subsystem to another for example from CEO to shareholders which could lead to destruction of the system as whole (firm) with prosperity of some subsystem (CEO) at expense of others (shareholders).

Overall I think this book is an excellent argument for libertarianism and for small local democracies against bureaucratic crony capitalism that currently is the organizational principle of majority of Western societies. Logically it leads to conclusion that we’d better start working now on developing general understanding and acceptance of these ideas if we want to be ready for inevitable self-destruction of super fragile contemporary societies. If we are successful, we’ll be able to smooth the transition to more Antifragile forms minimizing pain and suffering of this transition. If we’ll fail, the transition could be extremely painful. Just look at billions of lives lost and / or screwed in XX century’s painful transfer from autocratic states of kings and queens to democratic welfare states of politicians and bureaucrats.

20130601 USA Government Debts

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It became trivial to hear that US government debts become so huge and that we put our children and grandchildren in economic jeopardy by accumulating this debt. I think it is high time to clarify this thing a little bit.

First of all we cannot put economic future of people not yet born into jeopardy any more then we can eat today lunch prepared two month from now on Monday. Future generations will always be free to cancel this debt or just inflate money so debt will go away. We actually have a good example of it. After WWII the government debt of USA was $251.43 billion in 1945. It was pretty much paid off by 1970 when debt ratio to GDP went down to the prewar level. If one takes into account that average house price was $10.000 in 1945 and $24,000 in 1970 we can say that US borrowed at value of 25,143,000 houses and returned at value of 10,476,250 houses. So our grandchildren can return pennies on dollars and be just fine.

Much more important is that people seems to fail understand that internal debt is just an accounting method to represent wealth transfer from productive people to unproductive. If one think about it the mechanics is pretty simple. US FED creates dollars with which it buys T-bonds from US Treasure. The US treasury transfers these newly created dollars to bureaucrats and politicians who use these dollars to pay themselves and to buy goods and services that nobody would voluntary buy otherwise. A good traditional example would be a bridge to nowhere that nobody would build but government. A good contemporary example would be R&D for technology that nobody would invest into because there is no reason to believe that these R&D will produce anything useful beyond salaries for researches and revenues for contractors.

The net result of this debt is always and inevitably inflation because people who produce useful goods and services get the same dollars for them, that bureaucrats and politicians who do not produce anything useful and waste resources for unnecessary staff. Obviously the dollars paid by productive people represent value of goods and services they produced, while dollars paid by bureaucrats and politicians represent nothing valuable. The net result productive people get for their dollars less of useful goods and services then they produce, while bureaucrats and politicians lots and lots more.

As of now US bureaucrats and politicians (Federal + State + Local) consume 40% of GDP without producing anything valuable, that is something that people would by voluntary. That means that productive people get back 60 cents on dollar in valuable goods and services produced by other productive people in exchange for valuable goods and services that they produce themselves.

It is not obvious for a number of reasons. One reason is the complexity of exchange when people do not have ready option to compare value of what they produce with value of what they consume. This comparison is partially represented by taxes + government debt which is most obvious and therefore causes some pushback. However much more of this inflation is hidden For example increase in productivity that would led to decrease in prices and therefore better return on productive work is completely annulled by increase in government regulation that decreases productively. Another example is when bureaucratic machine takes over some valuable part of economy such as education and makes potentially productive teachers to deliver subpar educational services which by the way politicians on the top of bureaucracy from Clintons to Obamas refuse to use for their own children but insist on use by regular Americans.

So to summarize it in short – the government debt represent current transfer of valuable goods and services from productive people to unproductive bureaucrats and politicians and have no impact whatsoever on future generation except for decrease in current productive investment that could make their life better via new technology like flacking instead of bureaucratic boondoggles like wind energy; or infrastructure in form of bridge to somewhere instead of bridge to nowhere.

The good news is that next generation could be smarter, thru away society structure created by socialist / progressive ideological movements of XX century and create new libertarian and productive structure that would make their life much happier due to abundance of resources.

The bad news is that next generation is being educated by socialist/progressive bureaucrats and politicians with objective to maintain existing structure permanently and even expanding it. If the next generation will continue to buy their junk philosophy, they will continue to pay price in lack of resources ad decrease in quality of life.

The real remedy to government debt in democracy is the economic education of people, which as successful for majority will eliminate this unproductive structure.