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Forecast: What Extreme Weather Can Teach Us About Economics
In this thoroughly researched and piercingly intelligent book, physicist Mark Buchanan shows how a simple feedback loop can lead to major consequences, the kind predictable by mathematical models but hard for most people to anticipate. From his unique perspective, Buchanan argues that our basic assumptions about economic markets - that they are for the most part stable, with occasional interruptions - are simply wrong. Markets really act more like weather: a brief heat wave can become a massive storm in a matter of a few days, or even hours. Forecast re-imagines the basics of the financial world, with consequences that affect everyone.
272 pages, Kindle Edition
First published March 1, 2013
38 people are currently reading
403 people want to read
About the author
Mark Buchanan
7 books58 followersA physicist and author based in Europe writing mostly about science - physics, mathematics, social science and biology.
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Displaying 1 - 15 of 15 reviews
July 23, 2013
Markets are not Gaussian distributions, they behave according to power laws (think earthquakes). Markets have long memories. Keynes saw markets as beauty contests, where the key is to guess which contestants the judges (or other participants) will favor. Equilibrium is irrelevant, as markets have positive feedbacks, especially when many parties have the same strategy. Markets are predictable when the number of participants is lower than the number of possible outcomes.
Economists have avoided trying to explain the shocks in the market, and thus in the hour of greatest need, we are left to grope in the dark. "This isn't modeling at all, but a psychotic fantasy and dishonest application of math that removes all the important feedbacks and nonlinearality."
Humans are not strictly rational, especially in trading markets - neuroscientists determined that traders performed better on days when their morning levels of testosterone were highest (testicular verility!). Also found that cortisol rose when volatility rose (see Top Dog by Po Bronson) - makes us risk averse over time. Are we hard-wired for boom and bust?
Scientists have developed sophisticated tools for analyzing complex dynamic systems in a rigorous way (weather, epidemics, crowd psychology, etc). Such tools must be put to use to understand markets an economies, with an eye toward anticipating and managing asset bubbles, especially those fueled by debt. Blake LeBaron at Brandeis is mentioned as someone at the forefront of this agent-based modeling, which owes a debt to Hyman Minsky.
People are not rational economic animals, the behavioral economists have been proven right. Now the models we use to understand markets must incorporate those insights.
Economists have avoided trying to explain the shocks in the market, and thus in the hour of greatest need, we are left to grope in the dark. "This isn't modeling at all, but a psychotic fantasy and dishonest application of math that removes all the important feedbacks and nonlinearality."
Humans are not strictly rational, especially in trading markets - neuroscientists determined that traders performed better on days when their morning levels of testosterone were highest (testicular verility!). Also found that cortisol rose when volatility rose (see Top Dog by Po Bronson) - makes us risk averse over time. Are we hard-wired for boom and bust?
Scientists have developed sophisticated tools for analyzing complex dynamic systems in a rigorous way (weather, epidemics, crowd psychology, etc). Such tools must be put to use to understand markets an economies, with an eye toward anticipating and managing asset bubbles, especially those fueled by debt. Blake LeBaron at Brandeis is mentioned as someone at the forefront of this agent-based modeling, which owes a debt to Hyman Minsky.
People are not rational economic animals, the behavioral economists have been proven right. Now the models we use to understand markets must incorporate those insights.
October 19, 2013
A clearly written and informed perspective on the reasons traditional economic models continue to be useless in modeling actual economic activity through the ongoing devotion to equilibrium models. This pairs well with Nate Silver's The Signal and Noise, particularly in its focus on how the development of weather forecasting models (in terms of model construction and partially on results obtained) can provide a path forward to develop better models by understanding the dynamics of underlying phenomena and to account for positive feedback - things generally assumed away under the prevailing economic approaches.
September 7, 2016
A bit too much for the general reader, but good points and interesting ideas for using physics/natural sciences methods on economic forecasting.
August 23, 2018
The raison d’être for this book as the author describes it, is to fill a void. After the financial crisis there has been an immense amount of books describing psychological and institutional reasons for the crash. Yet the discussion around the soundness of the economic theories used to make sense of the world has been relatively absent. The physicist, author and science journalist Mark Buchanan takes on the challenge and concludes that there are a number of better tools to use to navigate the treacherous waters of the economy. Unfortunately the picture Buchanan paints of these other tools is too desultory.
Throughout the text there are two main themes. The first is economics bashing, or rather efficient market theory (EMT) and equilibrium bashing. The other is giving examples on a number of alternative ways to comprehend the processes of the economy and the financial markets. It is probably the case that for the semi-interested public the theoretical critique against efficient markets hasn’t filtered through sufficiently. But, although I agree with much of the bashing in principle, I start to feel that we are kicking someone that is already lying down. Those who are interested in this area know that equilibrium theories don’t capture the dynamics of markets especially well. Let’s move on and concentrate on the tools we should use instead!
In this respect Buchanan’s focus is interesting because much of the work done in behavioural finance focuses on establishing irrational behavior of individuals. This can be funny, quirky and sometimes useful if it can be turned into an investment strategy. The really interesting point however would be to take the next step and work on a coherent theory - or at least a set of reasonably connected sub-theories - on how the market really works on an aggregated level. This is exactly the hunting ground that the author tries to cover. Topics like complexity theory, power laws, unstable equilibriums, black swans, Austrian economics with it’s focus on an ever changing entrepreneurially driven economy and figureheads like Hyman Minsky, Frank Knight and George Soros pass by in fast-forward speed. Unfortunately there is little new for those who have followed the area, little direction in the text and nothing to tie all the interesting loose ends tighter.
Then comes chapter 6 called Ecologies of Belief, which establishes markets “as ecologies of interacting strategies”. In itself this is nothing ground breaking, it builds heavily on the thoughts of Andrew Lo and his Adaptive Market Hypothesis, but it presents some detail on phase transitions between predictable markets and unpredictable markets that was new to me and, more importantly, he takes a stance and decides that the market is a tug of war between strategies like value and momentum with the consequence that crowding into any strategy makes the market fragile and susceptible to crashes. Good, this is where you want the author to dig in, focus, develop and expand – to use his physics background to deepen our understanding. Instead he relapses into throwing more mud on equilibrium theory, discussing the perils of high frequency trading and the fragility of leveraged and connected financial systems.
Mark Buchanan is a good writer so the book is an easy read and it is packed with many of my favorite theories – the pieces of mosaic that make up my picture of markets. There is too much good stuff in this book to give it a really low grade. However, despite using in my view the correct tools you get the feeling that the author lacks some depth in market understanding that makes his punch against older faulty tools less potent. I would have liked Jim Simons of Renaissance Technologies to have written this book.
If you have read nothing about the critique against equilibrium based economics or the partial theories that are starting to fill the void when EMT has fallen then this book is not all that bad. If you have followed the area, don’t expect Forecast to add much to your knowledge.
Throughout the text there are two main themes. The first is economics bashing, or rather efficient market theory (EMT) and equilibrium bashing. The other is giving examples on a number of alternative ways to comprehend the processes of the economy and the financial markets. It is probably the case that for the semi-interested public the theoretical critique against efficient markets hasn’t filtered through sufficiently. But, although I agree with much of the bashing in principle, I start to feel that we are kicking someone that is already lying down. Those who are interested in this area know that equilibrium theories don’t capture the dynamics of markets especially well. Let’s move on and concentrate on the tools we should use instead!
In this respect Buchanan’s focus is interesting because much of the work done in behavioural finance focuses on establishing irrational behavior of individuals. This can be funny, quirky and sometimes useful if it can be turned into an investment strategy. The really interesting point however would be to take the next step and work on a coherent theory - or at least a set of reasonably connected sub-theories - on how the market really works on an aggregated level. This is exactly the hunting ground that the author tries to cover. Topics like complexity theory, power laws, unstable equilibriums, black swans, Austrian economics with it’s focus on an ever changing entrepreneurially driven economy and figureheads like Hyman Minsky, Frank Knight and George Soros pass by in fast-forward speed. Unfortunately there is little new for those who have followed the area, little direction in the text and nothing to tie all the interesting loose ends tighter.
Then comes chapter 6 called Ecologies of Belief, which establishes markets “as ecologies of interacting strategies”. In itself this is nothing ground breaking, it builds heavily on the thoughts of Andrew Lo and his Adaptive Market Hypothesis, but it presents some detail on phase transitions between predictable markets and unpredictable markets that was new to me and, more importantly, he takes a stance and decides that the market is a tug of war between strategies like value and momentum with the consequence that crowding into any strategy makes the market fragile and susceptible to crashes. Good, this is where you want the author to dig in, focus, develop and expand – to use his physics background to deepen our understanding. Instead he relapses into throwing more mud on equilibrium theory, discussing the perils of high frequency trading and the fragility of leveraged and connected financial systems.
Mark Buchanan is a good writer so the book is an easy read and it is packed with many of my favorite theories – the pieces of mosaic that make up my picture of markets. There is too much good stuff in this book to give it a really low grade. However, despite using in my view the correct tools you get the feeling that the author lacks some depth in market understanding that makes his punch against older faulty tools less potent. I would have liked Jim Simons of Renaissance Technologies to have written this book.
If you have read nothing about the critique against equilibrium based economics or the partial theories that are starting to fill the void when EMT has fallen then this book is not all that bad. If you have followed the area, don’t expect Forecast to add much to your knowledge.
January 9, 2017
Buchanan puts the market akin to weather, where the magnitude of change follows the power law. Like a loose surface balancing on a deeper torrent of fluctuation. Ideas of market stability and equilibrium start to loose their value.
There is little meat on what we can use to forecast the economy better going forward.
An extension of an insight gained from reading this is that if we want to trade off anomaly, we should look into studying corporate buying patterns, regulatory rules and behavioral finance.
There is little meat on what we can use to forecast the economy better going forward.
An extension of an insight gained from reading this is that if we want to trade off anomaly, we should look into studying corporate buying patterns, regulatory rules and behavioral finance.
November 19, 2020
Assolutamente indispensabile leggerlo
December 21, 2016
That book is enlighting. This book's synopses is also misleading. It covers much more ground that it says and I was amazed by the storm of ideas that Buchanan brings in this book. Forecasting in Economics and Finances isn't only about predicting behaviors of prices (the author will repeat that famous result that different from a weather forecast, once human beings know what about to happen in a market, their actions change and so does the outcome), it's about giving direction for policymakers and preventing, even somehow inaccurately, what crashes ahead in future. It's worthy spending your time in this book.
April 14, 2015
It was a really interesting analogy to compare financial markets to the weather. Markets are unpredictable and sometimes erratical and require an interdisciplinary approach to be fully comprehended. I couldn't help but thinking on the "river" concept Buchanan used on his network book and thinking how markets could be really similar to a river. Every one of them is different, it has it's own course and is affected by outside forces that make them go into motion. The neoclassical thought of equilibrium is no longer relevant, now we have to think how to achieve market stability.
May 21, 2013
This is a necessary book. It demonstrates in a clear and evidence-based manner why economics as it is currently taught is little better than reading tea leaves. It also points to some more hopeful signs that techniques developed for analysing dynamic systems in other fields might be used to create understanding of how markets actually behave in the real world.
July 14, 2014
- Good but not great. He seems to play the same double-meaning game with the word "rational" that he accusess economists of playing with "efficient." Otherwise, very thought-provoking, although off-puttingly negative at times. If his intended audience is economists, Buchanan might do better to guide them to his truth instead of trying to chop them down at the fundamentals.
January 25, 2014
One of the many books to come out of the 2008 financial crisis. It is a good book, instructing on the fragility of economic systems and the uncertainty of prediction, and exposing the shaky theoretical foundations on which much of economic edifice is built.
June 10, 2015
Markets are not efficient and have long tails, people are irrational, quantum crises come as soon as many people \ funds start to use the same strategy - good set of thoughts supported by analogies. I didn't like that the same thoughts were repeated several times
September 7, 2016
The content of the book or the idea prevalent throughout the book is mostly that prediction of stock market is not possible specially based on past data.. As it does not repeats itself... Interesting part is author has managed to bring examples from different industries to support the same ..
January 20, 2016
Read an advance copy and found it interesting in a Gladwell-esque kind of way, but rather dense
September 17, 2013
Interesting, well documented - and deserves a better editor.
Displaying 1 - 15 of 15 reviews