Uncertainty Is The Best That We Can Do?
What do Barry Ritholtz, Werner Heisenberg and Koodbee have in common? We all recognize the limits of our ability to know with certainty.
In 1927, Werner Heisenberg, a physicist, stated (in very broad terms) that we can’t know everything about the position and momentum of a particle; the more we know about one, the less we know about the other. Therefore, in certain situations, our knowledge is uncertain. Two years ago, Bloomberg contributor Barry Ritholtz posted The Trick To Making Better Predictions in which he urges investors to use probabilities to determine likely outcomes. Do not look for certainty. Today, at Koodbee, we are following the same path. In our effort to gather the collective wisdom of large crowds, we are using true odds — odds generated from the virtual bets of the crowd — which are statements of probability.
In our view, assertions of certainty have routinely failed the test of accuracy. How many times are the pundits wrong? How many financial experts in 2007 predicted the Crash of 2008 and for the right reasons? Notably, even that handful of analysts who understood the problem did not know when then problem would emerge and be reflected in the market. (For more on this subject, Michael Lewis’ The Big Short is a must read. And, yes, the book is even better than the movie, but I thought that the movie did a great job of explaining complex material.)
Instead of trying to be yet another “expert” who claims that we can predict the future, our goal is both more achievable and less grandiose. At Koodbee, we’re taking a known truth — that large and diverse crowds tend to make accurate predictions — and using true odds (i.e., pari-mutuel mathematics) to quantify the collective wisdom of those crowds. As the crowds become larger and more diverse, the accuracy of the odds, which are statements of probability, tend to become more accurate.
Once we accept the notion that the best we can do is to is to create statements of probability, then, as the number and diversity of Koodbee players increase and the number of outcomes we address increases, the value of Koodbee as a predictive source comparably increases. At least, that’s the theory. Stay tuned.