The Signal and the Noise: Why So Many Predictions Fail-but Some Don't

by Nate Silver

There is a kind of symbiosis between the irrational traders and the skilled ones—just as, in a poker game, good players need some fish at the table to make the game profitable to play in. In the financial literature, these irrational traders are known as “noise traders.” As the economist Fisher Black wrote in a 1986 essay simply called “Noise”: Noise makes trading in financial markets possible, and thus allows us to observe prices for financial assets. [But] noise also causes markets to be somewhat inefficient. . . . Most generally, noise makes it very difficult to test either practical or academic theories about the way that financial or economic markets work. We are forced to act largely in the dark.