3 percent chance of an attack that would kill 100,000, and a 0.

6 percent chance of one that would kill one million or more. These estimates need to be approache d cautiously. There is still considerable uncertainty, especially about the pote ntial for extremely large-scale events, and slightly different versions of this technique produce slightly different answers. However, there is one more instruc tive comparison to be made between terrorism and earthquakes. The Gutenberg Richte r law dictates that, over the long term, the frequency of earthquakes is reduced about ten times for every one-point increase in magnitude.

Nate Silver (2012-09-04T14:00:00+00:00). The Signal and the Noise (Kindle Locati ons 7489-7494). Penguin Group, USA. Kindle Edition. Think Probabilistically Bayes s theorem begins and ends with a probabilistic expre ssion of the likelihood of a real-world event. It does not require you to believ e that the world is intrinsically uncertain. It was invented in the days when th e regularity of Newton s laws formed the dominant paradigm in science. It does req uire you to accept, however, that your subjective perceptions of the world are a pproximations of the truth. This probabilistic element of the Bayesian way may s eem uncomfortable at first. Unless we grew up playing cards or other games of ch ance, we were probably not encouraged to think in this way. Mathematics classroo ms spend more time on abstract subjects like geometry and calculus than they do on probability and statistics. In many walks of life, expressions of uncertainty are mistaken for admissions of weakness. When you first start to make these pro bability estimates, they may be quite poor. But there are two pieces of favorabl e news. First, these estimates are just a starting point: Bayes s theorem will hav e you revise and improve them as you encounter new information. Second, there is evidence that this is something we can learn to improve. The military, for inst ance, has sometimes trained soldiers in these techniques,5 with reasonably good results.6 There is also evidence that doctors think about medical diagnoses in a Bayesian manner.7 It is probably better to follow the lead of our doctors and o ur soldiers than our television pundits. Our brains process information by means of oximation.8 This is less an existential fact than a biological necessity: we per ceive far more inputs than we can consciously consider, and we handle this probl em by breaking them down into regularities and patterns. Under high stress, the regularities of life will be stripped away. Studies of people who survived disas ters like the September 11 attacks found that they could recall some minute deta ils about their experiences and yet often felt almost wholly disconnected from t heir larger environments.9 Under these circumstances, our first instincts and fi rst approximations may be rather poor, often failing to recognize the gravity of the threat. Those who had been forced to make decisions under extreme stress be fore, like on the battlefield, were more likely to emerge as heroes, leading oth ers to safety.10 Our brains simplify and approximate just as much in everyday li fe. With experience, the simplifications and approximations will be a useful gui de and will constitute our working knowledge.11 But they are not perfect, and we often do not realize how rough they are. Consider the following set of seven st atements, which are related to the idea of the efficient-market hypothesis and w hether an individual investor can beat the stock market. Each statement is an ap proximation, but each builds on the last one to become slightly more accurate. N o investor can beat the stock market. No investor can beat the stock market over the long run. No investor can beat the stock market over the long run relative to his level of risk. No investor can beat the stock market over the long run re lative to his level of risk and accounting for his transaction costs. No investo r can beat the stock market over the long run relative to his level of risk and accounting for his transaction costs, unless he has inside information. Few inve stors beat the stock market over the long run relative to their level of risk an d accounting for their transaction costs, unless they have inside information. I t is hard to tell how many investors beat the stock market over the long run, be cause the data is very noisy, but we know that most cannot relative to their lev el of risk, since trading produces no net excess return but entails transaction costs, so unless you have inside information, you are probably better off invest ing in an index fund. The first approximation the unqualified statement that no in

vestor can beat the stock market seems to be extremely powerful. By the time we ge t to the last one, which is full of expressions of uncertainty, we have nothing that would fit on a bumper sticker. But it is also a more complete description o f the objective world. There is nothing wrong with an approximation here and the re. If you encountered a stranger who knew nothing about the stock market, infor ming him that it is

Nate Silver (2012-09-04T14:00:00+00:00). The Signal and the Noise (Kindle Locati ons 7655-7696). Penguin Group, USA. Kindle Edition. Think Probabilistically Bayes s theorem begins and ends with a probabilistic expre ssion of the likelihood of a real-world event. It does not require you to believ e that the world is intrinsically uncertain. It was invented in the days when th e regularity of Newton s laws formed the dominant paradigm in science. It does req uire you to accept, however, that your subjective perceptions of the world are a pproximations of the truth. This probabilistic element of the Bayesian way may s eem uncomfortable at first. Unless we grew up playing cards or other games of ch ance, we were probably not encouraged to think in this way. Mathematics classroo ms spend more time on abstract subjects like geometry and calculus than they do on probability and statistics. In many walks of life, expressions of uncertainty are mistaken for admissions of weakness. When you first start to make these pro bability estimates, they may be quite poor. But there are two pieces of favorabl e news. First, these estimates are just a starting point: Bayes s theorem will hav e you revise and improve them as you encounter new information. Second, there is evidence that this is something we can learn to improve. The military, for inst ance, has sometimes trained soldiers in these techniques,5 with reasonably good results.6 There is also evidence that doctors think about medical diagnoses in a Bayesian manner.7 It is probably better to follow the lead of our doctors and o ur soldiers than our television pundits. Our brains process information by means of oximation.8 This is less an existential fact than a biological necessity: we per ceive far more inputs than we can consciously consider, and we handle this probl em by breaking them down into regularities and patterns. Under high stress, the regularities of life will be stripped away. Studies of people who survived disas ters like the September 11 attacks found that they could recall some minute deta ils about their experiences and yet often felt almost wholly disconnected from t heir larger environments.9 Under these circumstances, our first instincts and fi rst approximations may be rather poor, often failing to recognize the gravity of the threat. Those who had been forced to make decisions under extreme stress be fore, like on the battlefield, were more likely to emerge as heroes, leading oth ers to safety.10 Our brains simplify and approximate just as much in everyday li fe. With experience, the simplifications and approximations will be a useful gui de and will constitute our working knowledge.11 But they are not perfect, and we often do not realize how rough they are. Consider the following set of seven st atements, which are related to the idea of the efficient-market hypothesis and w hether an individual investor can beat the stock market. Each statement is an ap proximation, but each builds on the last one to become slightly more accurate. N o investor can beat the stock market. No investor can beat the stock market over the long run. No investor can beat the stock market over the long run relative to his level of risk. No investor can beat the stock market over the long run re lative to his level of risk and accounting for his transaction costs. No investo r can beat the stock market over the long run relative to his level of risk and accounting for his transaction costs, unless he has inside information. Few inve stors beat the stock market over the long run relative to their level of risk an d accounting for their transaction costs, unless they have inside information. I t is hard to tell how many investors beat the stock market over the long run, be cause the data is very noisy, but we know that most cannot relative to their lev el of risk, since trading produces no net excess return but entails transaction costs, so unless you have inside information, you are probably better off invest ing in an index fund. The first approximation the unqualified statement that no in vestor can beat the stock market seems to be extremely powerful. By the time we ge t to the last one, which is full of expressions of uncertainty, we have nothing

that would fit on a bumper sticker. But it is also a more complete description o f the objective world. There is nothing wrong with an approximation here and the re. If you encountered a stranger who knew nothing about the stock market, infor ming him that it is Nate Silver (2012-09-04T14:00:00+00:00). The Signal and the Noise (Kindle Locati ons 7655-7696). Penguin Group, USA. Kindle Edition.