Thursday, April 26, 2007

Why Life isn't Fair and Predicting the Future is Impossible

There's an interesting article at OpinionJournal called Shattering the Bell Curve. If you've ever wondered why 1% of the population produces most of the income this article can help explain it. We are conditioned to think about random distributions like the Bell Curve where data is normally distributed. This works for finding the average weight or height of people, but lacks when measuring wealth or predicting future events. We will "never meet someone 14 feet tall, but... we might witness a market crash twice as big as October 1987".

The author (Shaywitz) claims that most changes in our society are unpredictable because change is not normally distributed. Things like the development of the Internet are only obvious in hindsight. This is why I wrote the post on Straight Line Projections.

Shaywitz points to 4 reasons why predicting who will be rich or what the future holds is contrary to our very nature:
  • confirmation bias - our tendency to reaffirm our beliefs rather than contradict them (the rich get rich by stealing from the poor)
  • narrative fallacy - our weakness for compelling stories (the media uses this to reaffirm a poor economy when the facts are contrary)
  • ludic fallacy - our willingness to oversimplify and take models too seriously (think global warming)
  • epistemic arrogance - our habit of overestimating our knowledge and underestimating our ignorance (global warming again)

One statement that rings so true to me is this:

"What is surprising is not so much the magnitude of our forecast errors, but our absence of awareness of it. we tend to fail miserably at predicting the future, but such failure is little noted nor long remembered."

1 comment:

limeade said...

Fabulous post. Very insightful. People also continue to make the same mistakes over and over instead of stepping back and trying to learn how not to make them.

-limeade