June 11, 2012
According to The Times, amongst the bundle of papers that Mr. Cameron has been given to read this week is an extract from Nassim Nicholas Taleb’s new book, “Anti-Fragility.” Being Prime Minister obviously has advantages, since the book is not due for publishing for at least another six months. Taleb famously published the Black Swan just before the Lehman Brothers fiasco in 2008. In this earlier book he basically says the you can’t always predict the future from past events.
In the new book, he emphasises the importance of differentiating between what he calls “signal” and “noise.” There is so much information in the modern age, he argues, that people make bad decisions because they confuse the general hubbub of life (noise) with the things that really matter (signal).
In my house, I find that the range of most wireless hubs to be much lower than the rating on the box (probably rated for American-style sheetrock rather than Victorian Brick), so I use a Powerline adapter. This overlays the 240v 50Hz mains supply with tiny fluctuations in current which can carry Ethernet packets. Another example of a tiny signal inside overwhelming noise. In many ways, pricing is often a signal-to-noise problem. As we review pricing history, there is much noise that must be tuned out before the pricing signals can be seen. The classic price waterfall is the first stage in hunting for the signal, as “noise” such as rebates, volume discounts, surcharges, fees, etc. are put to one side. What is left is often called the Pocket Price.
But the pricing signal is still quite noisy: further noise may need to be stripped out, depending on your market. You may need to account for seasonality, feedstock prices, econometric data, and foreign exchange. Advanced pricers are moving towards indices or ratios which are neutral of these effects. Another technique is segmentation: making sure that prices are truly compared between peers.
Taleb warns of trying to predict the future from the past, but this is because the past is often noisy. By stripping out the noise to reveal the underlying signal you can finally understand your market.
– James Marland