What are the incentives behind this prediction?

Predicting like Tyler Cowen, Enrico Fermi, and Nate Silver.

One way to think more like an economist is to think about incentives.

In our piece about Tyler Cowen, the setting is finding food in a strange place. The incentives question is, what to ask a concierge or driver considering their incentives are often avoid blowback rather than emphasize excellence.

The incentives of predictions are boiling in the last week before the US presidential election. Though math is always clear cut (2+2), the selection isn’t (why do 2+2 explain this?). Some polls, Nate Silver noted (on ModelTalk) offer extreme predictions as a form of marketing. Their incentive is attention, not precision.

In his update of The Signal and the Noise, Silver writes that it’s hard to change ones mind once allies, alliances, and reputation are created.

One way to avoid this pitfall is to make guesses to and with others who have a similar incentive structure. In the book, The Last Man Who Knew Everything, David Schwartz writes about Enrico Fermi. It’s December 1938 and Fermi has just fled Italy via Stockholm for his collection of the prize. It seems a good choice as the Italian media and Mussolini-mob wonder why Fermi shakes hands to receive his prize rather than give the fascist salute.

Settling into his professorship at Columbia (New York, but soon headed to Chicago) Fermi joins the “Society of Prophets”, or that’s at least what his wife calls it.

The Society meets monthly, and each member predicts ten yes/no events. A tally and total are kept. When the family moves to Chicago in 1942 Fermi successfully predicted 97% of the events.

“He did this, she (Laura) writes, using the most conservative algorithm imaginable: the next month would look almost exactly like the previous month. He did, however, miss one prediction—the surprise German invasion of the Soviet Union. The game was ideal for someone of Fermi’s temperament, invariably conservative and skeptical of any predictions of quick or revolutionary change.”

Fermi had strong priors. Fermi made boring predictions. Fermi was right. For Fermi and his colleagues the incentives were academic accuracy. For pollsters it’s media recognition.

The book is a bit thick, but inspiring is that while Fermi won the Physics Nobel Prize in 1938, his explanation for the discovery was wrong.