The Signal and the Noise

by Nate Silver

  71. David S. Scharfstein and Jeremy C. Stein, “Herd Behavior and Investment,” American Economic Review, 80, no. 3 (June 1990), pp. 465–479. http://ws1.ad.economics.harvard.edu/faculty/stein/files/AER-1990.pdf.

  72. Russ Wermers, “Mutual Fund Herding and the Impact on Stock Prices,” Journal of Finance, 7, 2 (April 1999), pp. 581–622. http://www.rhsmith.umd.edu/faculty/rwermers/herding.pdf.

  73. Total equities holdings for 2007 are estimated from the World Bank. (http://databank.worldbank.org/ddp/html-jsp/QuickViewReport.jsp?RowAxis=WDI_Series~&ColAxis=WDI_Time~&PageAxis=WDI_Ctry~&PageAxisCaption=Country~&RowAxisCaption=Series~&ColAxisCaption=Time~&NEW_REPORT_SCALE=1&NEW_REPORT_PRECISION=0&newReport=yes&ROW_COUNT=1&COLUMN_COUNT=51&PAGE_COUNT=1&COMMA_SEP=true). For 1980, they are taken from data on the market capitalization within the New York Stock Exchange (“Annual reported volume, turnover rate, reported trades [mils. of shares],” http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=2206&category=4) and multiplied by the ratio of all U.S. stock holdings to NYSE market capitalization as of 1988, per World Bank data. All figures are adjusted to 2007 dollars.

  74. James Surowiecki, The Wisdom of Crowds (New York: Random House, 2004).

  75. Silver, “Intrade Betting Is Suspicious.”

  76. Marko Kolanovic, Davide Silvestrini, Tony SK Lee, and Michiro Naito, “Rise of Cross-Asset Correlations,” Global Equity Derivatives and Delta One Strategy, J.P. Morgan, May 16, 2011. http://www.cboe.com/Institutional/JPMCrossAssetCorrelations.pdf.

  77. Richard H. Thaler, “Anomalies: The Winner’s Curse,” Journal of Economic Perspectives, 2, no. 1 (1998), pp. 191–202. http://econ.ucdenver.edu/Beckman/Econ%204001/thaler-winner’s%20curse.pdf.

  78. Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011), pp. 261–262.

  79. Odean, “Do Investors Trade Too Much?”

  80. Owen A. Lamont and Richard H. Thaler, “Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs,” Journal of Political Economy, 111, 2 (2003), pp. 227–268. http://faculty.chicagobooth.edu/john.cochrane/teaching/Empirical_Asset_Pricing/lamont%20and%20thaler%20add%20and%20subtract%20jpe.pdf.

  81. Virtually no risk but not literally no risk; there was a small amount of risk from the fact that the IRS might reject the spin-off.

  82. Lamont and Thaler, “Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs.”

  83. José Scheinkman and Wei Xiong, “Overconfidence and Speculative Bubbles,” Journal of Political Economy, 111, 6 (2003), pp. 1183–1220. http://web.ku.edu/~finpko/myssi/FIN938/Schienkman%20%26%20Xiong.volume-return.JPE_2003.pdf.

  84. Fisher Black, “Noise,” Journal of Finance, 41, 3 (1986).

  85. Sanford J. Grossman and Joseph E. Stiglitz, “On the Impossibility of Informationally Efficient Markets,” American Economic Review, 70, 3 (June 1980), pp. 393–408. http://www.math.ku.dk/kurser/2003-1/invfin/GrossmanStiglitz.pdf.

  86. Edgar Ortega, “NYSE Loses Market Share and NASDAQ Isn’t the Winner (Update3),” Bloomberg, June 24, 2009. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=amB3bwJD1mLM.

  87. Kent Daniel, Mark Grinblatt, Sheridan Titman, and Russ Wermers, “Measuring Mutual Fund Performance with Characteristic-Based Benchmarks,” Journal of Finance, 52 (1997), pp. 1035–1058.

  88. Franklin R. Edwards and Mustafa Onur Caglaya, “Hedge Fund Performance and Manager Skill,” Journal of Futures Markets, 21, 11 (November 2001), pp. 1003–1028.

  89. Ardian Harri and B. Wade Brorsen, “Performance Persistence and the Source of Returns for Hedge Funds,” Oklahoma State University, Agricultural Economics Working Paper, July 5, 2002. http://www.hedgefundprofiler.com/Documents/166.pdf.

  90. Rob Bauer, Mathijs Cosemans, and Piet Eichholtz, “Option Trading and Individual Investor Performance,” Journal of Banking & Finance, 33 (2009), pp. 731–746. http://arno.unimaas.nl/show.cgi?fid=15657.

  91. Joshua D. Coval, David A. Hirshleifer, and Tyler Shumway, “Can Individual Investors Beat the Market?” School of Finance, Harvard University, Working Paper No. 04-025/Negotiation, Organization and Markets, Harvard University, Working Paper No. 02-45; Sept. 2005. http://my.psychologytoday.com/files/attachments/5123/sept-2005-distributed-version.pdf.

  92. Benjamin Graham and Jason Zweig, The Intelligent Investor (New York: Harper Collins, rev. ed., Kindle edition, 2009).

  93. The S&P 500 is almost certainly preferable for these purposes to the Dow Jones Industrial Average, both because it includes a much broader and more diversified array of stocks and because it is weighted according to the market capitalization of each stock rather than their prices, meaning that it does a much better job of replicating the portfolio of the average investor.

  94. “Investing,” PollingReport.com. http://www.pollingreport.com/invest.htm.

  95. Calculations are based on Robert Shiller’s stock market data and assume dividends are reinvested. They ignore transaction costs.

  96. This is not a cherry-picked example. The average annual return for an investor who pursued this strategy would have been 2.8 percent since 1900.

  97. Black, “Noise.”

  98. Didier Sornette, Why Stock Markets Crash: Critical Events in Complex Financial Systems (Princeton, NJ: Princeton University Press, Kindle edition, 2005), location 3045.

  99. Ibid.

  100. “Quotation #24926 from Classic Quotes;” Quotations Page. http://www.quotationspage.com/quote/24926.html.

  CHAPTER 12. A CLIMATE OF HEALTHY SKEPTICISM

  1. “History for Washington, DC: Wednesday, June 22, 1988,” Wunderground.com. http://www.wunderground.com/history/airport/KDCA/1988/6/22/DailyHistory.html?req_city=Ronald+Reagan+Washington+National&req_state=DC&req_statename=District+of+Columbia.

  2. Kerry A. Emanuel, “Advance Written Testimony,” Hearing on Climate Change: Examining the Processes Used to Create Science and Policy, House Committee on Science, Space and Technology, U.S. House of Representatives, March 31, 2011. http://science.house.gov/sites/republicans.science.house.gov/files/documents/hearings/Emanuel%20testimony.pdf.

  3. James E. Hansen, “The Greenhouse Effect: Impacts on Current Global Temperature and Regional Heat Waves,” statement made before the United States Senate Committee on Energy and Natural Resources, June 23, 1988. http://image.guardian.co.uk/sys-files/Environment/documents/2008/06/23/ClimateChangeHearing1988.pdf.

  4. Philip Shabecoff, “Global Warming Has Begun, Expert Tells Senate,” New York Times, June 24, 1988. http://www.nytimes.com/1988/06/24/us/global-warming-has-begun-expert-tells-senate.html?pagewanted=all&src=pm.

  5. For most countries, statistics on obesity come from the World Health Organization’s Global Database on Body Mass Index. http://apps.who.int/bmi/index.jsp. Data on caloric consumption is from the Food and Agriculture Organization of the United Nations. http://www.fao.org/fileadmin/templates/ess/documents/food_security_statistics/FoodConsumptionNutrients_en.xls.

  6. “Nauru: General Data of the Country,” Populstat.info. http://www.populstat.info/Oceania/naurug.htm.

  7. One common technique requires adults to dutifully record everything they eat over a period of weeks, and trusts them to do so honestly when there is a stigma attached to overeating (and more so in some countries than others).

  8. J. T. Houghton, G. J. Jenkins, and J. J. Ephraums, “Report Prepared for Intergovernmental Panel on Climate Change by Working Group I,” Climate Change: The IPCC Scientific Assessment (Cambridge: Cambridge University Press, 1990), p. XI.

  9. David R. Williams, “Earth Fact Sheet,” NASA Goddard Space Flight Center, last updated November 17, 2010. http://nssdc.gsfc.nasa.gov/planetary/factsheet/earthfact.html.

  10. Yochanan Kushnir, “The Climate System,” Columbia University. http://eesc.columbia.edu/courses/ees/climate/lectures/radiation/.

  11. “What Is the Typical Temperature on Mars?” Astronomy Cafe. http://www.astronomycafe.net/qadir/q2681.html.

  12. Jerry Coffey, “Temperature of Venus,” Universe Tod
ay, May 15, 2008. http://www.universetoday.com/14306/temperature-of-venus/.

  13. Venus’s temperatures are much warmer on average than Mercury, which has little atmosphere and whose temperatures vary from –200°C to +400°C over the course of a typical day.

  14. Matt Rosenberg, “Coldest Capital Cities: Is Ottawa the Coldest Capital City?” About.com. http://geography.about.com/od/physicalgeography/a/coldcapital.htm.

  15. “Kuwait City Climate,” World-Climates.com. http://www.world-climates.com/city-climate-kuwait-city-kuwait-asia/.

  16. High temperatures average 116°F in August in Kuwait; lows average –17° F in Ulan Bator in January.

  17. “Mercury Statistics,” Windows to the Universe. http://www.windows2universe.org/mercury/statistics.html.

  18. “Human-Related Sources and Sinks of Carbon Dioxide” in Climate Change—Greenhouse Gas Emissions, Environmental Protection Agency. http://www.epa.gov/climatechange/emissions/co2_human.html.

  19. “Full Mauna Loa CO2 Record” in Trends in Atmospheric Carbon Dioxide, Earth System Research Laboratory, National Oceanic & Atmospheric Administration Research, U.S. Department of Commerce. http://www.esrl.noaa.gov/gmd/ccgg/trends/#mlo_full.

  20. Isaac M. Held and Brian J. Soden, “Water Vapor Feedback and Global Warming,” Annual Review of Energy and the Environment, 25 (November 2000), pp. 441–475. http://www.annualreviews.org/doi/abs/10.1146%2Fannurev.energy.25.1.441.

  21. Gavin Schmidt, “Water Vapor: Feedback or Forcing?” RealClimate.com, April 6, 2005. http://www.realclimate.org/index.php?p=142.

  22. Kerry A. Emanuel, “Advance Written Testimony.”

  23. J. H. Mercer, “West Antarctic Ice Sheet and CO2 Greenhouse Effect: A Threat of Disaster,” Nature, 271 (January 1978), pp. 321–325. http://stuff.mit.edu/~heimbach/papers_glaciology/nature_mercer_1978_wais.pdf.

  24. Google Books’ Ngram Viewer. http://books.google.com/ngrams/graph?content=greenhouse+effect%2Cglobal+warming%2Cclimate+change&year_start=1960&year_end=2010&corpus=0&smoothing=3.

  25. Broadly the same trends are present in academic journals.

  26. Erik Conway, “What’s in a Name? Global Warming vs. Climate Change,” NASA.gov. http://www.nasa.gov/topics/earth/features/climate_by_any_other_name.html.

  27. “No Need to Panic About Global Warming;” Wall Street Journal, January 26, 2012. http://online.wsj.com/article/SB10001424052970204301404577171531838421366.html?mod=WSJ_Opinion_LEADTop.

  28. “Denmark Energy Use (kt of oil equivalent),” World Bank data via Google Public Data, last updated March 30, 2012. http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=eg_use_pcap_kg_oe&idim=country:DNK&dl=en&hl=en&q=denmark+energy+consumption#!ctype=l&strail=false&bcs=d&nselm=h&met_y=eg_use_comm_kt_oe&scale_y=lin&ind_y=false&rdim=region&idim=country:DNK&ifdim=region&hl=en&dl=en.

  29. “United States Energy Use (kt of oil equivalent),” World Bank data via Google Public Data, last updated March 30, 2012. http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=eg_use_pcap_kg_oe&idim=country:USA&dl=en&hl=en&q=denmark+energy+consumption#!ctype=l&strail=false&bcs=d&nselm=h&met_y=eg_use_comm_kt_oe&scale_y=lin&ind_y=false&rdim=region&idim=country:DNK:USA&ifdim=region&hl=en&dl=en.

  30. “FAQ: Copenhagen Conference 2009;” CBCNews.ca, December 8, 2009. http://www.cbc.ca/news/world/story/2009/12/01/f-copenhagen-summit.html.

  31. Nate Silver, “Despite Protests, Some Reason for Optimism in Copenhagen,” FiveThirtyEight.com, December 9, 2009. http://www.fivethirtyeight.com/2009/12/despite-protests-some-reasons-for.html.

  32. “Energy/Natural Resources: Lobbying, 2011,” OpenSecrets.org. http://www.opensecrets.org/industries/lobbying.php?ind=E.

  33. “The Climate Bet,” theclimatebet.com. http://www.theclimatebet.com/gore.png.

  34. Kesten C. Green and J. Scott Armstrong, “Global Warming: Forecasts by Scientists Verses Scientific Forecasts,” Energy & Environment, 18, 7+8 (2007). http://www.forecastingprinciples.com/files/WarmAudit31.pdf.

  35. Armstrong articulates 139 on his Web site (rather than 89), although not all could be applied to the IPCC forecasts. J. Scott Armstrong, “Standards and Practices for Forecasting,” in Principles of Forecasting: A Handbook for Researchers and Practitioners (New York: Kluwer Academic Publishers, June 17, 2001). http://forecastingprinciples.com/files/standardshort.pdf.

  36. One problem this introduces is that some of the rules verge on being self-contradictory. For instance, one of Armstrong’s principles holds that forecasters should “use all important variables” while another touts the virtue of simplicity in forecasting methods. Indeed, the trade-off between parsimony and comprehensiveness when building a forecast model is an important dilemma. I’m less certain that much is accomplished by attempting to boil it down to a series of conflicting mandates rather than thinking about the problem more holistically. It also seems unlikely to me, given the number of rules that Armstrong suggests, that very many forecasts of any kind would receive a high grade according to his forecast audit.

  37. Nicholas Dawidoff, “The Civil Heretic,” New York Times Magazine, March 25, 2009. http://www.nytimes.com/2009/03/29/magazine/29Dyson-t.html?pagewanted=all.

  38. J. Scott Armstrong, “Combining Forecasts,” in Principles of Forecasting: A Handbook for Researchers and Practitioners (New York: Kluwer Academic Publishers, June 17, 2001). http://repository.upenn.edu/cgi/viewcontent.cgi?article=1005&context=marketing_papers.

  39. Per interview with Chris Forest of Penn State University.

  40. Neela Banerjee, “Scientist Proves Conservatism and Belief in Climate Change Aren’t Incompatible,” Los Angeles Times, January 5, 2011. http://articles.latimes.com/2011/jan/05/nation/la-na-scientist-climate-20110105.

  41. Kerry Emanuel, What We Know About Climate Change (Boston: MIT Press, 2007). http://www.amazon.com/About-Climate-Change-Boston-Review/dp/0262050897.

  42. Dennis Bray and Hans von Storch, “CliSci2008: A Survey of the Perspectives of Climate Scientists Concerning Climate Science and Climate Change,” Institute for Coastal Research, 2008. http://coast.gkss.de/staff/storch/pdf/CliSci2008.pdf.

  43. And these doubts are not just expressed anonymously; the scientists are exceptionally careful, in the IPCC reports, to designate exactly which findings they have a great deal of confidence about and which they see as more speculative.

  44. Ronarld Bailey, “An Inconvenient Truth: Gore as Climate Exaggerator,” Reason.com, June 16, 2006. http://reason.com/archives/2006/06/16/an-inconvenient-truth.

  45. Leslie Kaufman, “Among Weathercasters, Doubt on Warming,” New York Times, March 29, 2010. http://www.nytimes.com/2010/03/30/science/earth/30warming.html?pagewanted=all.

  46. “What’s the Difference Between Weather and Climate?,” NASA, February 1, 2005. http://www.nasa.gov/mission_pages/noaa-n/climate/climate_weather.html.

  47. Anthony Del Genio, “Clouds and Climate Change: The Thick and Thin of It,” Goddard Institute for Space Studies, NASA, December 2000. http://www.giss.nasa.gov/research/briefs/delgenio_03/.

  48. “KATRINA Graphics Archive,” National Hurricane Center, National Weather Service. http://www.nhc.noaa.gov/archive/2005/KATRINA_graphics.shtml.

  49. Gavin Schmidt, “Green and Armstrong’s Scientific Forecast,” RealClimate.org, July 20, 2007. http://www.realclimate.org/index.php/archives/2007/07/green-and-armstrongs-scientific-forecast/.

  50. “Occam’s Razor;” Wikipedia.org. http://en.wikipedia.org/wiki/Occam’s_razor.

  51. John Theodore Houghton, G. J. Jenkins, J. J. Ephraums, eds. Climate Change: The IPCC Scientific Assessment (Cambridge: Cambridge University Press, 1990). http://www.ipcc.ch/ipccreports/far/wg_I/ipcc_far_wg_I_full_report.pdf.

  52. “1.6: The IPCC Assessments of Climate Change and Uncertainties” in Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change; 2007. http://www.ipcc.ch/publications_and_data/ar4/wg1/en/ch1s1-6.html.

  53. “New York Snow: Central Park Sets the October Record from Noreaster,” Associated
Press via Huffington Post, October 29, 2011. http://www.huffingtonpost.com/2011/10/29/new-york-snow-noreaster_n_1065378.html.

  54. Anne Barnard and Sarah Maslin Nir, “Cleaning Up After Natures Plays a Trick,” New York Times, October 30, 2011. http://www.nytimes.com/2011/10/31/nyregion/october-snowstorm-sows-havoc-on-northeastern-states.html?pagewanted=all.

  55. This makes Central Park’s temperature record among the oldest in the United States. The oldest in the world is probably from the English Midlands, which has been updated continuously since 1659.

  56. “Average Monthly & Annual Temperatures at Central Park,” Eastern Regional Headquarters, National Weather Service. http://www.erh.noaa.gov/okx/climate/records/monthannualtemp.html.

  57. From peak to peak or trough to trough; the cycle goes from trough to peak in about half that time, or eighteen months.

  58. Mark C. Bove, et al., “Effect of El Niño on U.S. Landfalling Hurricanes, Revisited,” Bulletin of the American Meteorological Society, 79, 11 (1998). http://www.aoml.noaa.gov/hrd/Landsea/elnino/.

  59. Victoria Jaggard, “Sun Headed into Hibernation, Solar Studies Predict,” National Geographic News, June 14, 2011. http://news.nationalgeographic.com/news/2011/06/110614-sun-hibernation-solar-cycle-sunspots-space-science/.

  60. Sarah Ineson, et al., “Solar Forcing of Winter Climate Variability in the Northern Hemisphere,” Nature Geoscience 4 (October 9, 2011), pp. 753–757. http://www.nature.com/ngeo/journal/vaop/ncurrent/full/ngeo1282.html.

  61. Berrien Moore II and B. H. Braswell, “The Lifetime of Excess Atmospheric Carbon Dioxide,” Global Biogeochemical Cycles, 8, 1 (1994), pp. 23–38. http://www.agu.org/pubs/crossref/1994/93GB03392.shtml.

  62. “Global Land-Ocean Temperature Index in 0.01 Degrees Celsius Base period: 1951–1980,” Goddard Institute of Space Studies, NASA. http://data.giss.nasa.gov/gistemp/tabledata_v3/GLB.Ts+dSST.txt.