Prediction Revisited

1Introduction

We rely on experience to shape our view of the unknown, with the notable exception of religion. But for most practical purposes we lean on experience to guide us through an uncertain world. We process experiences both naturally and statistically; however, the way we naturally process experiences often diverges from the methods that classical statistics prescribes. Our purpose in writing this book is to reorient common statistical thinking to accord with our natural instincts.

Let us first consider how we naturally process experience. We record experiences as narratives, and we store these narratives in our memory or in written form. Then when we are called upon to decide under uncertainty, we recall past experiences that resemble present circumstances, and we predict that what will happen now will be like what happened following similar past experiences. Moreover, we instinctively focus more on past experiences that were exceptional rather than ordinary because they reside more prominently in our memory.

Now, consider how classical statistics advises us to process experience. It tells us to record experiences not as narratives, but as data. It suggests that we form decisions from as many observations as we can assemble or from a subset of recent observations, rather than focus on observations that are like current circumstances. And it advises us to view unusual observations with skepticism. To summarize:

Natural Process

• Records experiences as narratives.
• Focuses ...