Author Archives: Hal Finney

Predicting the Future with Futures

Commentator Brian recently pointed to a speech by Michael Crichton which quoted a saying attributed to Mark Twain: "I’ve seen a heap of trouble in my life, and most of it never came to pass." As Eliezer reminded us, predictions of the future are seldom accurate and seldom remembered. And as Twain’s quote indicates, predictions tend to be over-dramatized and exaggerate the difficulties and challenges that lie ahead.

Given these problems, it is helpful to realize that in many cases we can extract information about the future from a source which can be expected to be reasonably free of bias, and in many cases provides a track record that can be used to judge its accuracy: futures markets. I won’t try here to summarize or justify the reasons why such markets can be expected to provide among the best available sources of predictions, but rather below the fold I offer some predictions on current events and situations derived from various markets.

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Media Bias

A recent comment here by Brian expressed amusement at a citation of CBS news. Indeed, if you talk to a lay person about bias, one of the first examples that will come up is bias in the news media. A recent Zogby poll confirms widespread belief in the existence of such bias:

The vast majority of American voters believe media bias is alive and well – 83% of likely voters said the media is biased in one direction or another, while just 11% believe the media doesn’t take political sides…

I had a preconception that most people perceive bias as a function of difference from their own beliefs. Conservatives complain about liberal bias, while liberals complain about conservative bias. However the Zogby poll revealed that things are not as symmetrical as I had assumed:

While 97% of Republicans surveyed said the media are liberal, two-thirds of political independents feel the same, but fewer than one in four independents (23%) said they saw a conservative bias. Democrats, while much more likely to perceive a conservative bias than other groups, were not nearly as sure the media was against them as were the Republicans. While Republicans were unified in their perception of a left-wing media, just two-thirds of Democrats were certain the media skewed right – and 17% said the bias favored the left.

Overall, 64% perceived a liberal bias compared to 28% who see conservative bias.

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Big Issues vs Small Issues

I often start my postings with a joke, and I’ve come to see that the reason is that jokes that stay with me are ones that teach a lesson, and that the lessons are often relevant to the issues we discuss here. Here’s one version of one of my favorites:

An elderly woman is discussing gender-roles with her liberated granddaughter. "In the old days," says the grandmother, "the man wore the trousers and his wife respected him like a king. Take me and your grandfather, for example. All the big decisions were taken by him, while I was in charge of all the small matters." The young woman is horrified and asks for explanations. "Simple," says Granny, "your grandfather had the last word on the big issues, like the global oil prices and the cold war between the Soviets and the West. I took all the small decisions, like how to manage our family budget, what furniture we should buy and how to educate our children…"

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Beware of Information Porn

I hope this title doesn’t get the blog blacklisted. I assure you it is perfectly "SFW"!

I’m using "information porn" in a certain way based on an entertaining and informative Bloomberg article about investment firm Dimensional Fund Advisors. The article discusses DFA’s warnings about "investment porn", by which they mean articles that tout some new company or investment as the next big thing. DFA are followers of the Efficient Market Hypothesis, and one of their directors is economist Eugene Fama, a pioneer of the EMH. DFA were among the first fund families to create index funds and promote "passive investing", a sharp departure from traditional active investing, where fund managers try to cleverly pick stocks and other investments that have exceptional value. DFA is almost fanatical about their philosophy and really puts investment advisors through the wringer before allowing them to sell DFA funds. I suppose this can be seen as an example of the EMH applied to marketing; if you have a high value product, the market will figure it out and so you can afford to be picky about your customers. That seems to be their philosophy, anyway, and they’ve been quite successful at it.

Investment porn is therefore material which is exciting and makes you think you’re getting inside information, an inside track and a chance to do well in the markets ahead of everyone else. But it’s basically public information, so you’re deluding yourself if you think this kind of data is really going to give you an advantage.

I’m generalizing this to information porn, which can play a similar misleading role in more general areas of controversy where you are trying to come up with an unbiased view of the truth. Information porn in this sense is data which will supposedly lead you to the truth, often by promoting or arguing for a certain position. But as with the investment porn case, the data is fundamentally public and available to everyone. Once again, you are fooling yourself if you think that relying on this data is going to give you an advantage over the consensus opinion, because that opinion will already have taken this data into account.

This obviously ties into the Majoritarian view, and I want to thank commenter ChrisA for pointing out the connection between Philosophical Majoritarianism and the EMH. From this perspective, arguments and data which support a controversial position are much like pornography, and should be viewed with similar skepticism. (Or consumed with similar eagerness, depending on taste.)

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Morality of the Future

I am fascinated by the question of how our morality will change in the future. It’s relevant to the issue we have been discussing of whether we are truly making moral progress or not. So long as we view the question from a perspective where we assume that we are at the apex of the moral pyramid, it is easy to judge past societies from our lofty position and perceive their inadequacies. But if we imagine ourselves as being judged harshly by the society of the future, there is less self-satisfaction and ego boosting involved in making a case for true moral progress, hence less chance for bias. (In fact, when people make claims about how future society will judge the world of today, they almost always assume that their own personal moral views will become universal, so this hypothetical judgment merely mirrors their own criticism of contemporary society.)

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Philosophical Majoritarianism

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When I was growing up, I loved Charles Schulz’s Peanuts cartoons. One of my favorites was when they introduced a character with the name of 5. 5 explains that his father changed the family’s names to numbers in response to the growing use of numbers in society. “This is his way of protesting, huh?” he is asked. “No,” 5 explains. “This is his way of giving in.”

Faced with the inescapable reality of human bias, overconfidence, and error, I am responding the same way as 5’s father. I am giving in. I admit and accept that my judgments are fundamentally flawed and my ability to correct and even perceive my own bias is highly questionable. And like a follower of 12-step programs, after admitting my flaws and that I am powerless to correct them, I turn to a higher power. Since as discussed recently I don’t have a religious faith, my higher power is secular. It is in fact the collective wisdom of the entire human race.

I choose to adopt the view that in general, on most issues, the average opinion of humanity will be a better and less biased guide to the truth than my own judgment. I will refer to this doctrine as “philosophical majoritarianism”. “Majoritarianism” normally means the political doctrine that the majority should rule over the minority, so I am trying to distinguish my usage with the adjective “philosophical”. But for convenience, throughout this essay I will just call it “majoritarianism” with the understanding that I mean the usage defined in this paragraph.

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Disagreement Case Study 1

Robin asked a series of questions regarding case studies of disagreement. He didn’t get any public responses so I thought I would offer one experience I had.

I’ll try to answer his questions with regard to a topic where I have had a long-standing disagreement with a pretty smart guy, who undoubtedly knows more about that topic than I do. However his opinion, while shared with a vocal minority, is far outside the scientific mainstream belief. He now works as a professional advocate for his position, traveling all over the world giving talks, so he has very strong reasons to be biased, but we disagreed even before he took this job.

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The Coin Guessing Game

Some time back I thought of an example which shed light for me on some of the fail-to-disagree results. Imagine that two players, A and B, are going to play a coin-guessing game. A coin is flipped out of sight of the two of them and they have to guess what it is. Each is privately given a hint about what the coin is, either heads or tails; and they are also told the hint "quality", a number from 0 to 1. A hint of quality 1 is perfect, and always matches the real coin value. A hint of quality 0 is useless, and is completely random and uncorrelated with the coin value. Further, each knows that the hint qualities are drawn from a uniform distribution from 0 to 1 – on the average, the hint quality is 0.5.

The goal of the two players is to communicate and come up with the best guess as to the coin value. Now, if they can communicate freely, clearly their best strategy is to exchange their hint qualities and just follow the hint with the higher quality. However we will constrain them so they can’t do that. Instead all they can do is to describe their best guess at what the coin is, either heads or tails. And further, we will divide their communication into rounds, where in each round the players simultaneously announce their guesses to each other. Upon hearing the other player’s guess, each updates his own guess for the next round.

Read on below the break for some sample games to see how the players can resolve their disagreement even with such stringent constraints.

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Vulcan Logic

Sometimes reading the posts and discussions here I am reminded of some of the most interesting characters in science fiction: the Vulcans of Star Trek. Vulcans are depicted as having two main traits: they are extremely logical, and they are unemotional. These two characteristics are generally presented as if they are related, or even synonymous. Vulcans make decisions based on logic, in contrast to humans who frequently make decisions on emotional grounds.

When we try to overcome our biases and see the truth clearly, are we aiming to become Vulcans? Is Bayesian another word for Vulcan?

In some ways it does seem true. We talk about trying not to be influenced in our thinking by our hopes and fears, but to reason dispassionately and logically. Many or most of our biases are emotionally based and satisfy emotional needs. Vulcans have perfected the art of overcoming these sorts of biases. In many of our critiques here of bias, I mentally hear the voice of Mr. Spock chiding: "You are behaving most illogically."

One problem with the Vulcan emphasis on logic above all is that it is not clear what motivates Vulcans. Logic helps us to see what is true, but it cannot tell us what we ought to do. Indeed, although Vulcans in the stories are successful within the quasi-military structure of Star Fleet, where orders come from above and give them straightforward guidance as to what their goals should be, they seem to be at something of a loss if thrown into an ambiguous situation, separated from authority and forced to set their own goals.

This suggests that we do not want to become true Vulcans, but rather to retain a core of human emotionality surrounded by a shell of logic. Our emotions, our needs and our drives set our goals. Logic then helps us to achieve those goals. Logic is the means, but emotional satisfaction is the end.

I must admit that this sounds a little too pat. It is far from clear that we can separate our mental functions so nicely. Even Vulcans are depicted as suffering from rare episodes of near psychotic irrationality and emotion, as years of suppressed emotions seem to explode uncontrollably. I wonder if our efforts to channel and control our emotions may lead to similar catastrophic failures.

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The Future of Oil Prices 2: Option Probabilities

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A few days ago I showed a plot of oil futures prices, and Robin made the point that it would be useful to see information about variance as well. For each futures contract there are a set of options which can be used to deduce information about how much uncertainty the market sees in future prices. For example, the commodities price yesterday for December 2010 oil was $67 per barrel. But for $2 you could buy a call option with a strike price of $100. This will have a value of P – $100 if at the end of 2010 the oil price P is higher than $100 (and will have no value if the oil price is lower than $100). Therefore if oil goes up to $105 you will more than double your money; if it hits $122 you will make ten times your investment. Clearly the market does not view these possibilities as very likely, or the option would not be as cheap as $2. Below the fold I will describe and illustrate a simple technique for deriving probability estimates for price targets merely by glancing at tables of option values. I find it useful and practical in terms of getting a quick overview of how likely the market judges various possibilities.

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