The Map and the Territory 2.0: Risk, Human Nature, and the Future of Forecasting
Like all of us, though few so visibly, Alan Greenspan was forced by the financial crisis of 2008 to question some fundamental assumptions about risk management and economic forecasting. No one with any meaningful role in economic decision making in the world saw beforehand the storm for what it was. How had our models so utterly failed us?
To answer this question, Alan Greenspan embarked on a rigorous and far-reaching multiyear examination of how Homo economicus predicts the economic future, and how it can predict it better. Economic risk is a fact of life in every realm, from home to business to government at all levels. Whether we’re conscious of it or not, we make wagers on the future virtually every day, one way or another. Very often, however, we’re steering by out-of-date maps, when we’re not driven by factors entirely beyond our conscious control.
The Map and the Territory is nothing less than an effort to update our forecasting conceptual grid. It integrates the history of economic prediction, the new work of behavioral economists, and the fruits of the author’s own remarkable career to offer a thrillingly lucid and empirically based grounding in what we can
know about economic forecasting and what we can’t.The book explores how culture is and isn't destiny and probes what we can predict about the world's biggest looming challenges, from debt and the reform of the welfare state to natural disasters in an age of global warming.
No map is the territory, but Greenspan’s approach, grounded in his trademark rigor, wisdom, and unprecedented context, ensures that this particular map will assist in safe journeys down many different roads, traveled by individuals, businesses, and the state.
than 300 basis points in the 1870s (compared with 70 basis points a century later). The increasing efficiency of financial intermediation, owing to the consolidation of reserves and improvements in payment systems that allowed capital-to-assets ratios to decline, exerted competitive pressure on profit spreads to narrow. Accordingly, the annual average net income rate of return on equity was amazingly stable, rarely falling outside a range of 5 to 10 percent, measured annually, during the near
Domestic forecasting was directly or indirectly processed through the Federal Reserve’s macroeconomic model of the U.S. economy, though there was extensive tweaking of the model’s output to capture economic forces not captured by the model. Despite the fact that the model missed the collapse of 2008 along with virtually all other models, its historical record has been better than most. While decisions of the Federal Reserve’s Federal Open Market Committee (FOMC) are not legally subject to
often in complicity with the Church. Many countries reorganized under a rule of law that protected individual rights, especially property rights. By engaging our competitive self-interest, we fostered the innovations that changed the world after millennia of economic stagnation. Those were all acts of human intelligence from which the historical roots of modern capitalist economies have arisen. But that human intelligence has always existed side by side with a large strain of human irrationality.
MFP grew at an annual rate of 2.1 percent between 1947 and 1965. That pace almost surely reflected the buildup of a large backlog of applications of technological insights that could not be applied during the suppressed environment of the 1930s, and, of course, during World War II. Apparently having run through the significant backlog of new ideas, the process significantly slowed its pace of rise from 1965 to 1995. But for the next decade it regained momentum as the Internet’s role in
get the political credit, they (the Democrats) will.” Much to my retrospective distress, neither presidents Ford nor Reagan, for whom I worked, could or would effectively constrain the benefits juggernaut. THE TECTONIC POLICY SHIFT What was it about the early 1960s that set the stage for the remarkable surge in what later became known as “government social benefit payments to persons”?13 Certainly in the eight years of the Eisenhower presidency, the shift to expansive economic and fiscal