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

by Nate Silver

Summers thinks of the American economy as consisting of a series of feedback loops. One simple feedback is between supply and demand. Imagine that you are running a lemonade stand.83 You lower the price of lemonade and sales go up; raise it and they go down. If you’re making lots of profit because it’s 100 degrees outside and you’re the only lemonade stand on the block, the annoying kid across the street opens his own lemonade stand and undercuts your price. Supply and demand is an example of a negative feedback: as prices go up, sales go down. Despite their name, negative feedbacks are a good thing for a market economy. Imagine if the opposite were true and as prices went up, sales went up. You raise the price of lemonade from 25 cents to $2.50—but instead of declining, sales double.84 Now you raise the price from $2.50 to $25 and they double again. Eventually, you’re charging $46,000 for a glass of lemonade—the average income in the United States each year—and all 300 million Americans are lined up around the block to get their fix. This would be an example of a positive feedback. And while it might seem pretty cool at first, you’d soon discover that everyone in the country had gone broke on lemonade. There would be nobody left to manufacture all the video games you were hoping to buy with your profits. Usually, in Summers’s view, negative feedbacks predominate in the American economy, behaving as a sort of thermostat that prevents it from going into recession or becomin...