I don’t fully understand this excerpt from Nassim Nicholas Taleb’s forthcoming book Antifragile, but I found this bit to be intriguing:
The more frequently you look at data, the more noise you are disproportionally likely to get (rather than the valuable part called the signal); hence the higher the noise to signal ratio. And there is a confusion, that is not psychological at all, but inherent in the data itself. Say you look at information on a yearly basis, for stock prices or the fertilizer sales of your father-in-law’s factory, or inflation numbers in Vladivostock. Assume further that for what you are observing, at the yearly frequency the ratio of signal to noise is about one to one (say half noise, half signal) —it means that about half of changes are real improvements or degradations, the other half comes from randomness. This ratio is what you get from yearly observations. But if you look at the very same data on a daily basis, the composition would change to 95% noise, 5% signal. And if you observe data on an hourly basis, as people immersed in the news and markets price variations do, the split becomes 99.5% noise to .5% signal. That is two hundred times more noise than signal — which is why anyone who listens to news (except when very, very significant events take place) is one step below sucker. … Now let’s add the psychological to this: we are not made to understand the point, so we overreact emotionally to noise. The best solution is to only look at very large changes in data or conditions, never small ones.
I’ve long suspected, based on observations of myself as well as observations of society, that, beyond the psychological and cognitive strains produced by what we call information overload, there is a point in intellectual inquiry when adding more information decreases understanding rather than increasing it. Taleb’s observation that as the frequency of information sampling increases, the amount of noise we take in expands more quickly than the amount of signal might help to explain the phenomenon, particularly if human understanding hinges as much or more on the noise-to-signal ratio of the information we take in as on the absolute amount of signal we’re exposed to. Because we humans seem to be natural-born signal hunters, we’re terrible at regulating our intake of information. We’ll consume a ton of noise if we sense we may discover an added ounce of signal. So our instinct is at war with our capacity for making sense.
If this is indeed a problem, it’s not an isolated one. We have a general tendency to believe that if x amount of something is good, then 2x must be better. This leads, for instance, to a steady increase in the average portion size of a soft drink – until the negative effects on health become so apparent that they’re impossible to ignore. Even then, though, it remains difficult to moderate our personal behavior. When given the choice, we continue to order the Big Gulps.
