C1. Signal vs. Noise
Signal vs. Noise
To make well-informed choices, we need relevant data to give us a realistic understanding rather than outlier observations. Signal is the meaningful information tied to a systematic trend that we’re trying to detect. Noise is the sometimes random, sometimes skewed, information that will lead us astray. We want to understand societal trends, the profitability of our investments, and whether our relationships are healthy. But when we see yet another violent attack somewhere in the world on the news, is this reason to think that global violence is spiraling out of control (i.e., signal)? Or rather that this content is selected because of its dramatic properties, simply to compel your attention (noise)?
Most people want to do good. But our intentions are not enough, as we’re consistently fed inaccurate data from the media, impacting our decisions. If nothing else, the old logic of shit in, shit out holds true.
- Paraphrasing undisclosed source
Virtually all data indicate unprecedented positive development globally, including reduced poverty, war, and violence over the last fifty years. Turn on any news station, and it’s clear that their priority is not showing us the correct signal. Humans have evolved to reduce risk, and fear is an important signal that helps us survive. Mass media exploit our natural tendency to attend to danger to capture our attention. This information is not only useless to act upon but it also provides a faulty view of the world and people around us that will inhibit us from enjoying and interacting fully. We need to be mindful about what data we feed our minds as it may impact our lives even more than what nutrition we provide our bodies.
Gathering information to make informed decisions, we quickly encounter a range of biases distorting that data. These biases impact the creation of data, the communication of information, and the final interpretation by ourselves. Often questioning the incentives of those stakeholders may reveal apparent misalignments with the truth we’re seeking. Media are financed per views/readers, social platforms on time spent watching ads, and schools on the number of students they can attract. These incentives will often skew the data or the selection of data made, showing what someone wants us to see rather than what we need to see.
Distinguishing our biases as both individuals and as a society is a daunting task as they have become an integral part of who we are. Noticing them may require us to question and adjust our view of the world as well as ourselves. Hence, we will always seek data that support our current view and reinforce our position and belief by reinforcing our view that the other side is wrong. The world is complex, so we simplify things to confirm our identity as part of the righteous team, country, or religion. It feels great but effectively shields us from the nuanced world around us. To counter this bias, we can see any contradicting view or evidence as a great opportunity to obtain new information or a new way to interpret data. This way, conflicting views become complementing views, of which we can take inspiration when making our synthesis, now closer to reality.
While hard to distinguish between signal and noise, a couple of rules helps us evaluate news, stocks, and relationships over time. And that’s the key is right there. Time.
“A 15 percent return with a 10 percent volatility (or uncertainty) per annum translates into a 93 percent probability of success in any given year.”
(Taleb 2018)
Nassim Taleb explains that this translates to a mere 67 percent chance of success in a single month and only a 53 percent chance of success per day. What Taleb means is that forty-seven days out of every hundred days, this trade will seem to have failed, with a negative daily development, while performing perfectly fine over time. With today’s technology, we’re able to check stocks, news, and likes on a second-by-second basis. This ability is problematic as we’re not adapted to calmly await a long data series before judging rationally. Not only will we make the wrong decisions when trading stocks or over-interpreting the lack of likes. We will also increase our stress level by exposing ourselves to forty-seven days of bad news out of a hundred, instead of waiting a year and with a 93 percent likelihood of receiving the good news about our investment.
Similarly, watching someone win money a couple of times playing Russian roulette should not encourage us to join in. We must always consider the relevant time horizon to evaluate data for our decisions. Luckily this can be applied to several areas in our lives. Making good decisions can take time and considerable energy; hence, we don’t want to reevaluate daily. Instead, set a course with a clear decision, and determine what time horizon is relevant before reevaluating your choices. This strategy will allow us to make better decisions while reducing everyday uncertainty and angst triggered by irrelevant noise.
If we fail to understand these concepts, we may be fooled by theatrically bad news feeds and about the remedies to make things better. If, when you feel cold, you decide to use crystal energy to heal yourself rather than medicine, the chances are that you’ll get much better soon. Beyond some potential placebo, this will have nothing to do with the crystals. Instead, consider that feeling cold is rarely a signal showing consistently declining health but rather a couple of days feeling tired before getting well. This occurrence is often referred to as “regression to the mean” as an outlier value (Noise), feeling sick, often reverts to a mean value, feeling healthy (Signal). Remembering this relationship can be a sobering and calming realization when dealing with volatility, whether emotionally, interpersonally, or financially. If we can view things over a longer period, sorting out the noise, we can make better decisions with less anxiety.
SYNTHESIS:
- - Consider the relevant period for evaluation; usually use more extended periods.
- - Be aware of biases, our own and others. Who is telling us what and why?
- - Know that the information we decide to use will change our decision and, in effect, ourselves.