Q&A with author of “Forecast: What Extreme Weather Can Teach us About Economics”
A physicist by training, author Mark Buchanan’s acclaimed books and articles explain how “physics can help us understand our world better.”
This April 13 in Atlanta, Mr. Buchanan will present his ideas about nonlinear dynamics and complex systems as they relate to finance and socionomics at the 3rd annual Social Mood Conference. Reserve your seat today >>
Jill M. Noble: As a physicist and author, you’ve been thinking about natural, scientific patterns for 15-20 years. Would you explain how models that physicists use to understand the weather can be adapted to make complex financial systems understandable?
MB: It’s the natural way to think about markets, and there have been a few economists who thought about it this way (a hundred years ago). But they didn’t have the mathematical tools to begin building specific theories you can compare to data; to test if this way of thinking can make sense of how markets work.
JMN: So now that we have the tools…
MB: … Physicists have started build very detailed models of markets which you compare to the statistics of stock markets, bond markets, all type of financial markets across different regions. What you find is that the statistical patterns that come out of these theories fit the real world very well. Certainly they go far beyond any kind of equilibrium theory in actually accounting for real-world data.
The latest book I’ve written [explores] this analogy to the weather. When you write a book about modeling an economic system using ideas from physics, it sounds really complicated. But everyone understands the weather — we all have a good intuition for how changeable, and weird, and hard-to-predict weather is, just naturally.
JMN: That’s a useful analogy.
MB: …It’s the big collective pattern of all of our interactions that leads to ["market weather"]. The argument I’ve made in the book is that economics in some ways stands where weather science was about 50 years ago… We can now begin to do that in economics as well, and build up theories that start to categorize all the different kinds of forces that lead to bubbles and crashes, that lead to banking crises that lead to the imbalances which then cause disruptive events and often a lot of trouble for people in the real world.
JMN: I like where you’re going with the parallel between extreme weather and economics — because financial systems are neither simple nor random, like the weather.
MB: Exactly.
JMN: We want to believe that our human choices are based on rational thought, but it seems like that may not be the case. Could you speak to the concept of herding or why so many of our financial decisions are irrational?
MB: Right. In socionomics, the focus is about mood, and collective moods — and I think that’s absolutely correct… the market has a mood. Collectively, societies can have moods and get charged psychologically with certain kinds of energy and force. Historians and social scientists have talked about “social forces,” but it’s always been very vague — and for good reason: because it’s hard to pin down what those moods are; where those moods reside.
JMN: It’s been hard to measure.
MB: Yes, very hard to measure. But that doesn’t mean they’re not real. We used to think of people as rational beings. At least in our own individual lives, it’s easy to have the illusion that you’re making your decisions consciously and deciding what to do and when, all in your conscious brain. But a huge amount of research in the past century — particularly in the past few decades — has shown that an overwhelming amount of our behavior is not controlled by rational thought, whatsoever.
A lot of the time our rational thoughts are really just rationalizations after the fact: you make some decision (they even do brain imaging studies where you see the part of the brain involved in making the conscious decision activates a few hundred milliseconds after the part of the brain that carried out the muscle action involved in the decision)…
The brain seems to be more of a rationalization device than it is a rational device — at least, the conscious part of the brain. We know that we evolved from apes… and most of the history of our lineage was animals who were acting on instincts… they didn’t even have the conscious part of the brains; the outermost layer we have, that distinguishes us.
The rest of the brain that they were using is still perfectly active within us as well. A lot of the things we do are instinctual; a lot of our communications are non-verbal. The conscious part of our brain is this tiny little film on top of the much deeper substratum of our brain that is instinctual and archaic. It’s also hugely useful and powerful.
The realization that that part of the brain is so important and that we are not the rational beings we thought we were means that we have to change the way we think about human behavior and it means, if you start to model human behavior, that you are no longer modeling just rational, conscious thought. It’s showing how people interact with each other, how people get contextual cues from their environment (whether it’s in the news they’re reading of things they hear from their friends verbally or emotions they pick up from other’s facial gestures or tone of voice or whatever they hear.
There are so many ways we interact. I think all these mechanisms build up collective patterns of human emotion and mood that become predominant in markets or in one part of the country or another. Still, they’re very hard for us to perceive, but you can see fairly well how they do this and be very influential in driving collective social outcomes.
Maybe it was easy in the past, when you would hear people talking about socionomics and mood it was easy for economists and others to say “Oh, that’s vague, wishy-washy nonsense.” But that’s not easy to say anymore, because we know fully well that there are all these interactions going on and that there have to be collective patterns of mood, and psychological priming, and lots of effects that drive people on the molecular level that drive people to do certain actions rather than others.
I think all this work in psychology has really started to put in place a much more specific grounding by which we can start to actually understand collective social forces of which mood is one descriptor, and really start to build up a much more specific theory of how collective patterns move through societies [driven] by forces that often have to do very little with rational thought.
JMN: I think it’s a really exciting time where people are finally beginning to see that we’ve been rationalizing activities that we couldn’t understand until more recently – now we can see these big patterns and larger systems.
MB: Right. There’s something about the human brain: we like to flatter ourselves. We like to think we’re rational and “in control.”
JMN: It feels “safe” to think that you make your own choices and you’re not at the whims of your friends or what state you live in, what country you’re in; all kinds of larger networks. Especially Western minds.
MB: Yes, we have that tradition going down several centuries that places thought at the individual level.
JMN: Well, at the upcoming Social Mood Conference, we’ll have a gathering of non-linear minds at least. We can’t wait to hear your presentation.
MB: I’m looking forward to it.
Read Part 1 Here
Source
A physicist by training, author Mark Buchanan’s acclaimed books and articles explain how “physics can help us understand our world better.”
This April 13 in Atlanta, Mr. Buchanan will present his ideas about nonlinear dynamics and complex systems as they relate to finance and socionomics at the 3rd annual Social Mood Conference. Reserve your seat today >>
Jill M. Noble: As a physicist and author, you’ve been thinking about natural, scientific patterns for 15-20 years. Would you explain how models that physicists use to understand the weather can be adapted to make complex financial systems understandable?
MB: It’s the natural way to think about markets, and there have been a few economists who thought about it this way (a hundred years ago). But they didn’t have the mathematical tools to begin building specific theories you can compare to data; to test if this way of thinking can make sense of how markets work.
JMN: So now that we have the tools…
MB: … Physicists have started build very detailed models of markets which you compare to the statistics of stock markets, bond markets, all type of financial markets across different regions. What you find is that the statistical patterns that come out of these theories fit the real world very well. Certainly they go far beyond any kind of equilibrium theory in actually accounting for real-world data.
The latest book I’ve written [explores] this analogy to the weather. When you write a book about modeling an economic system using ideas from physics, it sounds really complicated. But everyone understands the weather — we all have a good intuition for how changeable, and weird, and hard-to-predict weather is, just naturally.
JMN: That’s a useful analogy.
MB: …It’s the big collective pattern of all of our interactions that leads to ["market weather"]. The argument I’ve made in the book is that economics in some ways stands where weather science was about 50 years ago… We can now begin to do that in economics as well, and build up theories that start to categorize all the different kinds of forces that lead to bubbles and crashes, that lead to banking crises that lead to the imbalances which then cause disruptive events and often a lot of trouble for people in the real world.
JMN: I like where you’re going with the parallel between extreme weather and economics — because financial systems are neither simple nor random, like the weather.
MB: Exactly.
JMN: We want to believe that our human choices are based on rational thought, but it seems like that may not be the case. Could you speak to the concept of herding or why so many of our financial decisions are irrational?
MB: Right. In socionomics, the focus is about mood, and collective moods — and I think that’s absolutely correct… the market has a mood. Collectively, societies can have moods and get charged psychologically with certain kinds of energy and force. Historians and social scientists have talked about “social forces,” but it’s always been very vague — and for good reason: because it’s hard to pin down what those moods are; where those moods reside.
JMN: It’s been hard to measure.
MB: Yes, very hard to measure. But that doesn’t mean they’re not real. We used to think of people as rational beings. At least in our own individual lives, it’s easy to have the illusion that you’re making your decisions consciously and deciding what to do and when, all in your conscious brain. But a huge amount of research in the past century — particularly in the past few decades — has shown that an overwhelming amount of our behavior is not controlled by rational thought, whatsoever.
A lot of the time our rational thoughts are really just rationalizations after the fact: you make some decision (they even do brain imaging studies where you see the part of the brain involved in making the conscious decision activates a few hundred milliseconds after the part of the brain that carried out the muscle action involved in the decision)…
The brain seems to be more of a rationalization device than it is a rational device — at least, the conscious part of the brain. We know that we evolved from apes… and most of the history of our lineage was animals who were acting on instincts… they didn’t even have the conscious part of the brains; the outermost layer we have, that distinguishes us.
The rest of the brain that they were using is still perfectly active within us as well. A lot of the things we do are instinctual; a lot of our communications are non-verbal. The conscious part of our brain is this tiny little film on top of the much deeper substratum of our brain that is instinctual and archaic. It’s also hugely useful and powerful.
The realization that that part of the brain is so important and that we are not the rational beings we thought we were means that we have to change the way we think about human behavior and it means, if you start to model human behavior, that you are no longer modeling just rational, conscious thought. It’s showing how people interact with each other, how people get contextual cues from their environment (whether it’s in the news they’re reading of things they hear from their friends verbally or emotions they pick up from other’s facial gestures or tone of voice or whatever they hear.
There are so many ways we interact. I think all these mechanisms build up collective patterns of human emotion and mood that become predominant in markets or in one part of the country or another. Still, they’re very hard for us to perceive, but you can see fairly well how they do this and be very influential in driving collective social outcomes.
Maybe it was easy in the past, when you would hear people talking about socionomics and mood it was easy for economists and others to say “Oh, that’s vague, wishy-washy nonsense.” But that’s not easy to say anymore, because we know fully well that there are all these interactions going on and that there have to be collective patterns of mood, and psychological priming, and lots of effects that drive people on the molecular level that drive people to do certain actions rather than others.
I think all this work in psychology has really started to put in place a much more specific grounding by which we can start to actually understand collective social forces of which mood is one descriptor, and really start to build up a much more specific theory of how collective patterns move through societies [driven] by forces that often have to do very little with rational thought.
JMN: I think it’s a really exciting time where people are finally beginning to see that we’ve been rationalizing activities that we couldn’t understand until more recently – now we can see these big patterns and larger systems.
MB: Right. There’s something about the human brain: we like to flatter ourselves. We like to think we’re rational and “in control.”
JMN: It feels “safe” to think that you make your own choices and you’re not at the whims of your friends or what state you live in, what country you’re in; all kinds of larger networks. Especially Western minds.
MB: Yes, we have that tradition going down several centuries that places thought at the individual level.
JMN: Well, at the upcoming Social Mood Conference, we’ll have a gathering of non-linear minds at least. We can’t wait to hear your presentation.
MB: I’m looking forward to it.
Read Part 1 Here
Source