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

by Nate Silver

Robert Shiller, the Yale economist, had noted its beginnings as early as 2000 in his book Irrational Exuberance.14 Dean Baker, a caustic economist at the Center for Economic and Policy Research, had written about the bubble in August 2002.15 A correspondent at the Economist magazine, normally known for its staid prose, had spoken of the “biggest bubble in history” in June 2005.16 Paul Krugman, the Nobel Prize–winning economist, wrote of the bubble and its inevitable end in August 2005.17 “This was baked into the system,” Krugman later told me. “The housing crash was not a black swan. The housing crash was the elephant in the room.” Ordinary Americans were also concerned. Google searches on the term “housing bubble” increased roughly tenfold from January 2004 through summer 2005.18 Interest in the term was heaviest in those states, like California, that had seen the largest run-up in housing prices19—and which were about to experience the largest decline. In fact, discussion of the bubble was remarkably widespread. Instances of the two-word phrase “housing bubble” had appeared in just eight news accounts in 200120 but jumped to 3,447 references by 2005. The housing bubble was discussed about ten times per day in reputable newspapers and periodicals.21 And yet, the ratings agencies—whose job it is to measure risk in financial markets—say that they missed it. It should tell you something that they seem to think of this as their best line of defense. The problems with their pr...