A couple of weeks ago I mentioned Jeff Friedman's book, War and Chance. It's about uncertainty in international politics, but has a lot of application to thinking about businesses and investing. Some thoughts:amazon.com/War-Chance-Ass…
2/Two quotes from early on: “…analysts avoid assessing uncertainty in a manner that supports sound decision making" and “analysts cannot speak about the future without engaging in some form of probabilistic reasoning.”
3/Common mistakes: 1.Use words of estimative probability instead of probabilities themselves; 2.Discuss relative probability – probability assessment that conveys an analyst’s beliefs with respect to an unspecified baseline;
4/ Common mistakes (con't): 3.Conditioning – occurs when analysts describe the conditions that must hold in order for a statement to be true.
5/Epistemic uncertainty = outcomes are unknown because analyst possesses incomplete information. This type of uncertainty is always subjective.
“To say that a judgment is subjective does not mean that it is careless or uninformative”
6/Probability – reflects analysts’ beliefs about the chances that a statement is true; Confidence – reflects the extent to which analysts belief they possess a sound basis for assessing uncertainty
7/ Basis for confidence: 1. Reliability of available evidence; 2. Range of reasonable opinion surrounding a judgment; 3. Degree to which analysts believe their judgment could change in response to new information
8/How to find your indifference point: 1. You will $1,000 if a Republican wins next election; 2. You win $1,000 if coin toss comes up heads. If you prefer bet on Repub, outcome is at least 50% If you bet on coin, outcome of Repub is no higher than 50% Toggle until indifferent
9/If you believe range is 40-60% with equal probability, take the average = 50% If equally credible analyst are between 40-60%, take the average If analysts are not equally credible, weight their views Translate views into bets --> eee @AnnieDuke
10/“There is no instance in which foreign policy analysts can coherently offer a qualitative probability estimate but not a qualitative probability estimate.”
11/“…the value of precision in probability assessment reflects a generalizable skill that foreign policy analysts can cultivate through training, effort, and experience.” See @PTetlock and @dgardner and @superforecaster
12/"…if foreign policy analysts are truly worried about making errors or having their judgments distorted, their best move might be to embrace probabilistic reasoning, rather than avoid it.”
13/ “In the long run, analysts who are evaluated using the Brier score will achieve their best results by reporting their true beliefs.”
14/A decision is worthwhile if pB > C, where p = probability of success, B = benefit, and C = cost. Or worthwhile if p > C/B You can invert; don’t know p, figure out what C/B would makes sense.
15/Basic Standards for Assessing Uncertainty 1.“describe the uncertainty surrounding any prediction or policy recommendation;” 2.Never use relative probability or conditioning;
16/Basic Standards (con't) 3.“…assessments of uncertainty should be clear enough for readers to reliably understand what they mean. Supplement key judgments with numeric percentages;” 4.“consistently distinguish between assessments of probability and confidence.” FIN
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