Picture an early scene from The Wizard of Oz: Dorothy hurries home as a tornado gathers in what was once a clear Kansas sky.
Hurriedly, she seeks shelter in the storm cellar under the house, but, finding it locked, takes cover in her bedroom. We all know how that works out for her.Many investors these days are a bit like Dorothy, putting their faith in something as solid and trustworthy as a house (or, say, real estate). But market disruptions - storms - seem to arrive without warning, leaving us little time to react.
Why are we so often blindsided by these things, left outdoors with nothing but our little dogs? More to the point: how did Kansas go from blue skies to tornadoes in such a short time? In this deeply 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 the weather: a brief heat wave can become a massive storm in a matter of a few days, or even hours. The Physics of Finance reimagines the basics of how economics, with consequences that affect everyone.
©2013 Mark Buchanan (P)2013 Audible, Inc.
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"An Eye Opener"
This well written and highly accessible book should be compulsory reading for anyone interested in politics, economics, finance, or anyone who is just trying to achieve or maintain a modicum of prosperity in an uncertain future.
The author's main point is that positive feedback mechanisms can lead to bubbles and instability in the economy just as easily as negative feedback can cause (localized and temporary!) stability and equilibrium, and that future financial crises are therefore just as "natural" as future rain storms. The author makes this point very cogently, and indeed it's really somewhat obvious if you think about it enough, but the author also clearly shows that far too many of the people in charge in politics and finance have a complete blind spot when it comes to that simple truth, and due to their blind faith in self correcting markets make stupid and massively expensive mistakes. (Yes, Gordon Brown, we are talking about you here, among many others.)
The criticism of the "efficient market hypothesis" in this book is particularly clear and penetrating, and I would love to hear the author's reaction to the fact that last year's economics Nobel prize went to the inventors of the efficient market myth. If the Swedish academy can get it so wrong, I guess that just underscores why this book is so important.
One of the most important books I've read in years, and to top it all off it's even quite enjoyable, as the book's narrative is nicely illustrated with well researched and fascinating glimpses into the mathematics of earth quakes, the workings of stock markets, or state of the art forecasting methods in meterology and in finance.
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