Chaos Economics

Tonight I was reading in a book* how the chaos models used to predict weather are the same principles used to forecast economic trends.

People forecasting weather understand that these models work well up to three days out and then deteriorate quickly. People have accepted this and understand that if someone tells you a month and a day from now it will rain, they are guessing. Nobody listens to the long term forecast (or even the short term for that matter) and takes it as gospel truth.

Meanwhile economists utilizing the same principles will often mistake these forecasts for something resembling truth. They forget that the models work to give a good probability of near term events, absolutely suck at predicting upcoming trends a week or more out, but give a decent overview of how markets behave in general. Even though many of them are gifted in the field of mathematics, they neglect to consider that a slight shift even in the ten-thousandths (.0001) can cause radical changes that render the end result unrecognizable from its nearly identical (at the start) counterpart.

The models demonstrate that major spikes and valleys will occur. A deregulated market will make for some pretty wild swings. A strictly regulated market would make both the highs and lows considerably less radical. The odds of getting rich go down but so do the odds of getting wiped out.

If you establish a garden inside of a greenhouse, you can control most of the 'weather' for that system. That means more work for you but with less risk. If you are looking to invest, you can put your money in a guaranteed savings account**. You'll have to put a hell of a lot in to get anything out of it, but the chances of losing it all are quite slim.

The opposite of this would probably be throwing your apple core into a ditch on your way to buy some lottery tickets.

* Yes they still print books and yes people still read them.

** Current interest rates are out-paced by inflation. Think of it as having to put in two to draw out one. It's still better than losing your inheritance because your mom insisted on investing in Enron.