Forecast: What Physics, Meteorology, and the Natural Sciences Can Teach Us About Economics

Forecast: What Physics, Meteorology, and the Natural Sciences Can Teach Us About Economics

Mark Buchanan

Language: English

Pages: 272

ISBN: 1608198537

Format: PDF / Kindle (mobi) / ePub

Positive feedback―when A produces B, which in turn produces even more A―drives not only abrupt climate changes, but also the most important and disruptive events in economics and finance, from asset bubbles to debt crises, bank runs, even corporate corruption. But economists, with few exceptions, have ignored this reality for fifty years, holding onto the unreasonable belief in the wisdom of the market. It's past time to be asking how do markets really work? Can we replace economic magical thinking with a better means of predicting what the financial future holds, in order to prepare for, or even avoid the next extreme economic event?

In Forecast, physicist and acclaimed science writer Mark Buchanan answers these questions and more in building a new model for economics, one that accepts that markets act much like the weather does. While centuries of classical financial thought has trained us to understand "the market" as something that always returns to equilibrium, economies work more like our atmosphere―a loose surface balance riding on a deeper torrent of fluctuation. Market instability is as natural―and dangerous―as a prairie twister. With Buchanan's help, we can better govern the markets and weather their storms.

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world responded quite spontaneously to the opportunities created by the iPhone and iPad, filling every niche and need. The market crafted an exquisite plan—without any planner. Even so, I am going to argue that the idea of markets as a marvelous self-regulating and stabilizing machine, as developed in economics, is mostly a fantastic dream, and that our understanding of how markets work is actually quite primitive. Economics hasn’t really kept up with, and benefited from, the most important new

the value of Morgan Stanley stock jumped upward by about 4 percent as investors piled into the stock, apparently believing that the government would step in if necessary to save Morgan Stanley. But the efficient market theory doesn’t just claim that information moves markets. It claims that only information moves markets. Prices should always remain close to their so-called fundamental values—the realistic value based on accurate consideration of all information concerning the long-term

interest spike, Americans collectively would save 5 percent more. Each person in this view responds independently and the group acts much like a giant agent—the “representative agent.” It sounds plausible enough, right? But it is a radical oversimplification. If groups represented only the interests of the individuals within them, we’d never get traffic jams; no one ever decides they would like to create one. Interactions matter, often far more than intentions and desires. Traffic is a reminder

fundamental mismatch between our mental models of how we influence the world around us, and the actual changes we induce in that world, especially through technology: No matter how careful one is in designing human interventions in the environment, the outcome is never what it was intended to be. It seems to me that this phenomenon is due to the fact that every human action upon the environment modifies the latter in many more ways than its human actors perceive, simply because the

assumptions about human behavior, in particular about how managerial directives might flow from one level in an organization to another, but they didn’t have individuals maximizing anything, a mortal sin. Of course, when you get down to it, the need for microfoundations in an economic theory has little to do with making that theory realistic. On this point, a commenter on the blog of economist Simon Wren-Lewis expressed the matter quite clearly: Microfoundations would be important if there were

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