How to predict better?

Everybody makes predictions. Most predictions are irrelevant in the big picture, but everyone makes them. For example, you can predict tomorrow´s weather. Most of the time, it doesn´t matter whether you are right or wrong. But sometimes you have to be outside for the whole tomorrow and then it matters. You make these predictions without a systematic process. You need to have a systematic process to make better predictions. This text is about making them.

Commit to the truth

The first step for making better predictions is to commit to the truth. You have to recognize the influence of your beliefs, and psychological tendencies and you have to question them. You cannot make predictions that confirm your way of seeing the truth when the evidence does not confirm your beliefs or assumptions. You have to be willing to update your beliefs and assumptions when the objective facts tell you different stories than you would like to see. Your beliefs and assumptions have the power to modify your predictions in wrong directions unless you commit to find the truth no matter what that is. Your goal is to make the best prediction you can make with the facts you can gather. If you think you do not have enough facts, you have to commit to finding them. If you have too many facts, you have to commit to separating the relevant facts from noise.

The process of making good predictions

Most people have three different answers to predictions: ”Yes”, ”No”, and ”Maybe.” People who make good predictions live in an uncertain world. In this world, ”Maybe” is the only right answer. This means that you have to make predictions with probability estimates. Your prediction could look like this: ”There is a 70% chance of raining tomorrow.” You also have to second-guess all the people who make vague predictions like ”It may rain tomorrow” or ”The unemployment rate may be less than 5% in the next two years.” You cannot know whether these people have made the right predictions because their predictions can mean anything. If you want to make better predictions, you have to commit to making probability estimations.

The starting point for making a probability estimation is to find a base rate for the thing you are predicting. For example, if you have to predict what is the probability that your football team will win the next home game, you have to start by looking at how many wins they have won in their home games this season. Your sample size should be enough. If the season has just started, you have to look for last season´s statistics, too. Let´s say they won 7 out of their last 10 home games, then the base rate is 70%. This is your starting point. Then you have to use other data to adjust your probability estimate. Why should you start with a base rate? Because your first estimation is just your hunch and the probability of it being right is smaller than using the base rate. The figure you find first will be the most available for your brains. It will be your anchor during your prediction process. Do not forget to define the time frame for your prediction if necessary.

After you have figured out the base rate, you can start forming your view. Break your question to smaller questions like ”What would have to be true for this not to happen?”, ”What kind of information helps me to answer this question?” or ”What I do not know about this question?” You have to figure out what you don´t know and what you do know. After many questions, you should make your probability estimate and write it down and the reasons behind it.

Then, it is time to find out some outsider view about the same question. Consult people who have made predictions about the same question. Find out what the experts think and their reasons. Focus on the differences in reasons between your view and other people. Consult prediction markets, like stock markets, or betting offices that give odds to a thing you predict. You can use polls if you predict the elections, etc. After you have found out the base rate, made your probability estimate, and found out about the outside views, you have to synthesize and make another probability estimate.

Let the time pass and then you can scrutinize your own prediction and make another estimation. You can do it by assuming your first estimate is wrong. Consider why it is wrong and write down the second estimate and reasons for it. And then find out about other outside views again. Then, synthesize again and update your prediction when new important information arrives. This process ends when the time frame closes. This process can feel frustrating. If you want to predict better, you have to update your estimates often and make gradual adjustments to your predictions.

Prepare to be wrong. Even the best predicting professionals are occasionally wrong. Do not mix up the outcome of the prediction and the quality of the process. When you have 80/20 predictions, you are rt only 4 out of 5 predictions when your probability estimates have good accuracy. No matter whether you are right or wrong, have a postmortem. Think about the process and the reasons behind your estimate. Did your process have high quality? Did you find out the right base rate? Did you update your estimate often enough? Did you find out the outside views of the best professionals and prediction markets? How many times you synthesized these views? All these questions help you to predict better next time.

Sources:

Superforecasting, Philip Tetlock

The Signal and the Noise, Nate Silver

-TT

About me

Before I start with the introduction, I would like to tell you that I will get back to publishing texts next week. This text is about introducing myself to the readers.

I am Tommi Taavila. I am an independent thinker, a lifelong learner, A son, a brother, an author, and Finnish. I stumbled upon the latticework of mental models by accident. I was searching for answers about what makes the best investors better than others about five years ago and I found Poor Charlie´s Almanack and Charlie Munger´s latticework of mental models system. I realized that it is not only good for investing, but it is probably the best way of understanding the world. When I learned more, I figured out that everybody has their mental models and latticeworks. Most people just haven´t registered that the way they think and act is through their mental models. The quality of the models and latticeworks people have could be much better.

What are my qualifications?

I have no diploma for creating a latticework of mental models. Nobody does. You can have a few diplomas in a few disciplines. But you cannot have diplomas for all the most important disciplines. And you do not need to have them. You just have to understand the big ideas of the most important disciplines and how they intertwine. The former is easy, but the latter is hard. You can learn all the big ideas in all the most important scientific disciplines in a few thousand hours or even less if you know what they are before you start learning. I have monitored my hours for the last two years and I have spent about 2,000 hours learning the models better. This is the best-measured qualification I have for understanding the models. These 2,000 hours consist of reading, writing, and taking notes. These hours measure the direct work about the models in the last two years. Then there are the things I learned before doing this systematic work for finding out and understanding the models in the last two years.

Then, there come the qualifications for understanding how these models intertwine which is much harder. It is more about thinking habits. You have to like thinking. You have to have intellectual curiosity and stretch your mental muscles in multiple directions and want to do it. You need to have a talent in seeing the connections between two completely different phenomena. You have to be able to find real causes behind events. You have to be able to see that some events are just higher-order effects from underlying causes, not events that are caused by the most obvious explanations. Most people do not have all these intellectual traits.

Then there are the traits you can´t have. You cannot suffer from any strong ideologies. For example, you cannot think that capitalism gives you all the answers and socialism is a completely bad ideology. You have to think that both of them have their bad and good characteristics. You can´t have an IQ that is too low. A little bit better than average is enough. You cannot believe that all the answers to the problems of your discipline can be found from the big ideas of your discipline. For example, economics without understanding psychology is pretty much useless. And still, most economists ignore psychology by focusing on the myth of economically rational humans.

A fair warning. I am 80 percent sure I have all the mentioned intellectual traits for doing this. Nobody can be 100 percent sure of most things. If they are, they do not understand the world. My biggest obstacle for doing this is an excessive self-regard. I have a big ego and I have put much effort into doing this. The latter increases the former. I am not always right and I don´t always think I am right. My probability estimate can be wrong too. You have to decide whether it is close to the truth or not. If you repeatedly read my texts, you have probably made some kind of estimation already.

Other information

I am sure you have noticed that my English is far from perfect. I hope you can still understand my texts. I have no business around mental models. I plan to publish three books in the next ten years. The first one will probably be published before the end of 2020. Selling books can make some money, but I doubt it will be enough to compensate for the time I will use for my texts and books. Most of the information in the books is published on this website. You don´t have to buy books to get information. The differences between those books and the information on this website are that books have better edited and more coherent content. I am an independent thinker. I have no research grants, no foreman, no relationships with my sources, and no sponsors to produce this content. I prefer it that way because the only person who can distort my content is me. I also write for a financial online publication Piksu.net and have published three books in Finnish.

Until next week!

-TT