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Who is the author of Forecast?

The author of Forecast is Mark Buchanan.

Economics

Forecast Book Summary - Forecast Book explained in key points

Forecast summary

Name: Forecast
Rating: 3.7 (14 reviews)
Author: Mark Buchanan

Mark Buchanan

What Physics, Meteorology and the Natural Sciences can teach us about Economics

3.7 (14 ratings)

18 mins

Brief summary

Forecast by Mark Buchanan explores the science of prediction and the limits of our ability to predict the future. It offers insights into why our forecasts often fail and how we can make better predictions by understanding the complexity of the systems we're trying to predict.

Topics

Economic Theory

Table of Contents

Forecast
Summary of 10 key ideas

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Key idea 1 of 10

What’s in it for me? Find out why the economic landscape is changing so drastically, and how the hard sciences can help us to understand and predict its evolution.

Since the 2008 financial crisis, the question of how we might better predict such a catastrophe in the future has been at the forefront of economists’ minds. Six years later, we’ve never felt a greater need for a new model of economics.

As Forecast shows, basic assumptions made by economists are so divorced from the economic reality that they almost invalidate the contemporary economic models.

By explaining the flaws in our current economic models and thinking, physicist Mark Buchanan lays the groundwork for a new economics, in which we learn to think of, and analyze, the economy much in the same way meteorologists predict the weather.

Using his knowledge of other fields of research, like biology, physics, psychology or meteorology, Buchanan derives insights that, he argues, could help us to advance the scientific study of the economy.

In these blinks, you’ll learn:

how economics began and what the invisible hand refers to;
about limitations and flaws in current economics;
why new financial phenomena, like High Frequency Trading and Leveraging, make economies both more efficient and less stable; and
why economic forecasts should be more similar to weather forecasts.

The concept of equilibrium helped to explain early discoveries in economics.

As any economist worth her salt will know, Adam Smith played a major role in developing economics – the scientific study of the economy in the eighteenth century.

In 1776, Smith wrote the influential The Wealth of Nations, in which he explained how the division of labor could increase a company’s productivity.

Let’s say a company produces pins. If every employee were responsible for just one step in the production chain – for example, one person to cast the metal, and another to smelt it – the company would be far more productive.

Smith also introduced another major concept: the invisible hand. According to his theory, if everyone pursued his or her selfish interests, eventually this would lead to beneficial outcomes for our society.

If we apply this concept to the pin company example, if the company introduces a division of labor into its production process, the result is that it can offer its pins at a cheaper price, hence benefiting itself (more sales) and society (cheaper prices).

In order to give these early discoveries scientific credibility, economists adopted the concept of equilibrium. They invoked the Greek physicist Archimedes, who used equilibrium to explain the workings of levers and other simple mechanisms. Equilibrium, for Archimedes, was achieved when both arms of a lever bore an equal weight at an equal distance.

Early economists also used Isaac Newton’s theory of gravity to lend credibility to the equilibrium concept. With his theory, Newton claimed that unbalanced forces affect every object, essentially accelerating it until it reaches a state of equilibrium. According to Newton, an apple falling from a tree reaches its equilibrium when it hits the ground.

It was in such august company as Archimedes and Newton that, in 1874, economist Léon Walras adopted the concept of equilibrium in order to explain Smith’s theory of the invisible hand. Using mathematics, Walras demonstrated the way in which both supply and demand eventually come to a state of equilibrium, where the total demand is satisfied by a sufficient supply.

As we’ll see in the following blinks, the concept of equilibrium still plays a major role in modern economics.

Markets in equilibrium are efficient.

We say that a market is in equilibrium when it contains many suppliers, and product prices decrease until they hit an optimal price point for both buyers and sellers. Thus, as they satisfy both buyer and seller, markets in equilibrium are optimal – or, in other words, they’re efficient.

In 1954, economists were able to show that for every saleable good, there is a specific price at which supply equals demand.

Price changes in the financial markets aren’t caused solely by information.

In a 2009 study, economists wanted to find empirical evidence for the EMH. They analyzed how information affected the price level of more than 900 stocks over a period of two years.

One key statistic they were investigating was the volatility of prices. Volatility describes the fluctuation in prices within a given period. If the price doesn’t change much, volatility is low. If it changes a lot, it’s high.

Even if we’re capable of being rational, we certainly don’t behave rationally all the time.

At the basis of the EMH is the assumption that people are consistently rational. However, this is far from the truth.

Richard Thaler, an economist from the University of Chicago, placed an ad in the Financial Times, inviting people to play a simple game. Participants had to choose a number between 0 and 100. The winner? The one who chooses the number closest to two thirds of the average of everyone else’s choice.

A financial market can be highly efficient and highly unstable at the same time.

In 2007, the world witnessed the beginning of a major banking crisis, which destroyed a great deal of money. Even though there are countless expert economists out there trying to make sense of our economy, almost none of them anticipated the severity of this crisis.

In an effort to ensure that we’ll never be as blind to such possible outcomes in the future, and thus to help us prevent similar disasters from reoccurring, economists are constantly testing their knowledge of the market.

Technological advances have made trading cheaper, but they also decrease the stability of financial markets.

Today, computer algorithms play a major role in our culture. They’re hard at work gathering data while we fritter away time on Facebook, and they even play Cupid for many people looking for their perfect match.

It’s unsurprising, then, that algorithms are an integral part of contemporary stock trading. Designed to buy and sell mispriced stocks, such algorithms analyze market data and, on the basis of the results, decide whether or not to sell. This enables traders to turn a large profit by trading massive volumes of that stock.

Earthquakes and market crises share surprising similarities.

What do major earthquakes and market crises have in common? They’re both extremely difficult to predict.

The basic mechanism behind earthquakes is pretty straightforward. While two tectonic plates slide together, one plate gets forced under the other. The resulting friction causes the plates to stick together and store a massive amount of energy that is released when the plates finally slip: the earthquake.

Traditional economic thinking is misguided as it fails to consider that people live by irrational theories.

What’s the best time to go to a bar? When it’s quiet enough to get a seat? Or when there’s enough of a crowd to create a good atmosphere?

Rather than making rational decisions, people tend to rely on theories and strategies, a phenomenon that was illustrated by a puzzle created by Stanford economist Brian Arthur.

Social influence affects our decision-making and thus should be incorporated into economic models.

Peer pressure: we’ve all experienced it. Whether we like it or not, as social creatures, we tend to conform to the influences of those around us.

In 1951, US psychologist Solomon Asch ran an experiment. He asked people to say which of three lines of different lengths matched the length of another line. The lengths of the three lines differed so much that the correct answer should’ve been obvious.

Like weather forecasts, economic forecasts could be made on the basis of simulations.

If we’re able to predict the weather, could it be possible to do the same for the economy?

Thanks to modern computers and simulation algorithms, it’s possible to forecast the weather with a high degree of accuracy. Take the two supercomputers at the heart of Reading’s European Center for Medium Range Weather Forecasts. These computers analyze a virtual atmosphere: by taking different meteorological aspects into account, such as air pressure, they simulate possible scenarios.

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What is Forecast about?

Forecast critiques modern economic theory by revealing its major flaws. Physicist Mark Buchanan takes a close look at basic scientific assumptions behind our economic understanding and, with deft analytical skills, he unveils their inaccuracy. In the second part of the book, Buchanan presents a range of scientific discoveries that he believes might eventually help us to improve modern economics.

Forecast Review

Forecast (2013) by Mark Buchanan is a fascinating exploration of the science behind predicting future events. Here's why this book is definitely worth reading:

It delves into the world of complex systems and chaos theory, providing insights into how patterns and trends emerge in everything from the weather to the stock market.
Using real-world examples and captivating anecdotes, the book demonstrates the limitations and challenges of forecasting, challenging our assumptions about predictability.
With its accessible and engaging writing style, Forecast takes a complex subject matter and makes it stimulating and thought-provoking, ensuring that readers won't find it boring.

Best quote from Forecast

Belief in equilibrium confers a sense of safety and predictability, and reflects a firm belief in the triumph of human logic over nature.

—Mark Buchanan

Who should read Forecast?

Anyone interested in economics, science or politics

About the Author

Mark Buchanan is a physicist and the author of four books, all of them concerned with applying principles of physics to other fields. Besides his work as an editor for the prestigious scientific journal Nature, he has also worked as a journalist, writing for the New York Times, The Independent and The Harvard Business Review.

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