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Butterfly Economics: A New General Theory of Economic and Social Behaviour Hardcover – 7 Nov 1998

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  • Hardcover: 240 pages
  • Publisher: Faber & Faber; 1st edition (7 Nov. 1998)
  • Language: English
  • ISBN-10: 0571190057
  • ISBN-13: 978-0571190058
  • Product Dimensions: 22.2 x 2.3 x 14.3 cm
  • Average Customer Review: 5.0 out of 5 stars  See all reviews (4 customer reviews)
  • Amazon Bestsellers Rank: 1,192,071 in Books (See Top 100 in Books)

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In Butterfly Economics, Ormerod challenges conventional thinking with the idea that economics is more akin to a biological than a mechanical system. Therefore, by looking at how individuals actually behave instead of analysing predicted behaviour, governments will have a more realistic view of economic theory.

Drawing from sociology, psychology and even entomology (the study of insects), Ormerod argues that the control governments believe they exert over economies is illusory. He throws out the notion that individuals behave according to a clearly defined set of economic rules and argues that people are most likely to be influenced by the behaviour of others. Ormerod backs this up by citing the inability of companies to predict which will be the most popular toy each Christmas or which films will be hits with the consumer. Applying his theory to a wide variety of topics from the financial markets to voting behaviour, he argues effectively for less political intervention.

Ormerod lives up to his reputation as the thinking person's economist in this easy to digest book. His message to governments and businesses alike is to forget short-term intervention and in its place to think strategically by looking at the big picture and long-term results.

About the Author

Paul Ormerod has been head of the Economic Assessment Unit at The Economist and a visiting professor at the Universities of London and Manchester. He lives in London. --This text refers to the Paperback edition.

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2 of 2 people found the following review helpful By Sebastián Llorente on 11 Nov. 2002
Format: Paperback
After searching some books offering an introduction to chaos theory and its possibilities for economics, I'm happy to say I have found it.
This book is a brilliant introduction for people tired of established, well respected economic theory that fails to catch up reality in 99% of the cases.
The reader will find a nice book to enter a very good explanation on how the economy really behaves, not worrying too much about maths. But this does not mean ideas are fussy or indetermined.
Nevertheless, bibliography is too short for those who want to go further into the issue of chaos applied to economics, and it still will require some more development to become a real full size general theory.
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1 of 1 people found the following review helpful By Sebastián Llorente on 11 Nov. 2002
Format: Paperback
I had been thinking about how modern mathematics should be applied to solve old economic problems. This book offers the reader a quick glance on why has conventional economic theory failed to describe and predict reality.
For a long time we have been taught, as economists, about wonderful mathematical complex systems that were not worth a penny, sometimes wondering what a doctor or an arquitect would feel if they had to learn by heart middle ages ideas on medicine or arquitecture, for heart surgery or building up the petronas towers. Like mister Ormerord says, using 19th century tools to solve 21st century problems.
This book is quite an intelectual challenge for all of us who do not take established economic thought as sacred and do not think that when reality and theorical predictions differ, reality is to be blamed for it.
It points loads of interesting questions, advancing the framework for a new general theory.
However, I miss a wider bibliography to go deeper in the issue. it would have contributed more to create a general theory if its ideas had been better organized.
It is a brilliant introduction to people who are seeking for an introduction on chaos applied to economics, setting aside mathematics.
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1 of 2 people found the following review helpful By "dbgscotland" on 15 Oct. 2003
Format: Paperback
When confronted with a choice ants have a strategy where they switch between 3 tactics randomly.
Generalising this to humans, explains speculative bubbles in financial markets and why films can be greatly different in their level of success.
The success can start randomly, then others imitate behaviour.
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0 of 1 people found the following review helpful By A Customer on 23 April 1999
Format: Hardcover
Describing nonlinear / nonequilibrium effects in economics is not easy but Ormerod has made the best expose to date. His prose is concise and clear and his case compelling. You know someone is really good when they make it look this easy. I know because I have recently written a book (Nonlinear Pricing, Wiley, 1999) on a related topic.
Butterfly Economics is a must read for those who seek to prosper in the 21st century. Ignore Ormerod's information age thinking at your own peril.
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Most Helpful Customer Reviews on (beta) 27 reviews
42 of 47 people found the following review helpful
A new economics, based on complexity. 8 Jun. 2000
By Bill Godfrey - Published on
Format: Hardcover
This is a brilliant successor to Ormerod's previous Death of Economics. It lucidly and wittily demonstrates the fallacy that economic forecasts can predict. More important, it further develops his economic theories based on complexity. His conclusion: "governments should do much less .. detailed short-term intervention .. and [spend more time] thinking about the overall framework.'
Ormerod is rare (I am tempted to say unique) among economists. He uses clear and straightforward English - and he has a devastating wit. Assuming that you bring yourself to read books on economics, when was the last time that one caused you to laugh aloud?
Butterfly Economics combines clear English, humour and the capacity to translate the realities of human behaviour into a credible explanation of the behaviour of economies. It is very readable, even if you are not really interested in economic theory. The importance of the book and its predecessor is that they provide a better explanation of what is going on than do conventional explanations. It explains why so much of government economic policy produces unintended side effects and it also supports the arguments of Brian Arthur and others that initial inequalities tend to become magnified. Behind the simple explanation is some quite rigorous analysis based on the mathematics of complexity, but this is kept decently in the background for the sake of the general reader.
Whereas the primary focus of attack in The Death of Economics was the assumptions underlying 'general equilibrium theory' - the cornerstone of economics and economic policy - Butterfly Economics concentrates on one aspect of human behaviour - choice. It shows what happens when one relaxes the unreal assumption that buyers form their preferences independently and are not influenced by the behaviour of others.
26 of 29 people found the following review helpful
Interesting and accessible, but repetitive 21 Jan. 2002
By E A Glaser - Published on
Format: Paperback
Paul Ormerod's "Butterfly Economics" has several points in its favor. He writes intelligently and with conviction about the flaws he perceives in economic theory, and without requiring any advance knowledge of economics beyond what one might read in the newspaper.
His best contribution comes in the first chapter, when he talks about an experiment that was done with ants which revealed that the ants don't make independent choices about where to gather food -- they always have a statistical chance of being affected by the choices of other ants. His point is that conventional economic theory assumes that people are individual agents who always make the best choice, rationally and independently of other people. This is clearly an iffy assumption, when in fact people are more like ants in that we are constantly influenced by our peers. The author further compares macro-economic trends with similar graphs depicting the ants' mostly unpredictable behavior. Hence, he concludes that economic theory (and the policies that are based on economic theory) are misguided because they don't take into account the inter-relatedness of people's choices, and in a larger sense, because it is not even possible to make accurate enough predictions of future states of the economy (or even the exact current state). His wish is that governments should stop meddling altogether, and quit pretending that they have any kind of control over the economy.
My main complaint is that I was expecting a more in-depth take on the subject; I should probably check out other books by the same author, because he does have a very readable and amusing style and clearly has a lot of knowledge and passion for the subject of economics. Unfortunately, Ormerod plays this one note about the ants throughout the whole book and I was losing interest by the end. I guess I was expecting deeper analogies as the book progressed, but the ants keep coming back in every chapter. It's an interesting and plausible analogy, but still. I understand that this book was written for a lay audience with not much mathematical or economic training, so perhaps this was part of the author's effort to keep the book accessible and consistent throughout.
My other complaint is probably just me ... perhaps I'm too much a dyed-in-the-wool cynic and libertarian, but the points he's stressing (that governments don't have the control over the economy that they claim, and that they should stop tinkering so much) seemed pretty obvious to me already. You don't have to read the paper for too long before you notice that the economic forecasts that governments rely upon to make decisions are often drastically altered as new data is collected and interpreted. It's not a big leap to say that all their tinkering is done to present the appearance of doing something, without having actual predictable outcomes. On the other hand, you don't have to be an economist to know that American presidential elections are almost always decided by the economy (well, except for the last one), because voters blindly give credit or blame for the state of the economy to whatever party is in power. So maybe more people should read this book to get a better perspective on the limits to the power that their government actually has. "Butterfly Economics" provides some nice counter-evidence to the idea that the government even knows what direction the economy is going in at any given time, much less able to determine a course of action that will make the economy "better".
"Butterfly Economics" is okay as a starting point, but I would recommend reading it and then going on to read "The Tipping Point" and books on chaos theory and cellular automata if you're interested in more information about the mechanics of the ant trends Ormerod talks about. More in-depth critiques of economic theory I'll have to find on my own (although any suggestions would be welcome).
17 of 19 people found the following review helpful
All that is solid melts into air... 8 Nov. 2005
By Junglies - Published on
Format: Paperback Verified Purchase
When I left Albion's shores some ten years ago, examination entrants for economics were in decline as A-level students switched to Business Studies in their droves. Economics departments in universities across the British Isles have closed and indeed, in my alma mater (or at least one of them) there are a mere two economists remaining but, as the joke goes, with three opinions between them.

I came across Ormerod's book in a reference in a publication by the Institute of Economic Affairs and since receiving it I have scarecly put it down.

My first degree is in Economics and prior to completing that degree I had several qualifications in the subject. My specialisma were in the History of Economic Thought and Development Economics but my extra-curriculla activities brought me into contact with the Austrian School mainly through the tremendous work of Ralph Harris and Arthur Seldon at the IEA. The abstraction in modern economics and the tools with which it operates mean that there is often a chasm between the work of the theorists and the realities of life. Too often the forecasts have gone and been forgotten but in hindsight they are often wildly inaccurate. In the United States there has been a lengthy debate throught the intermediary of newspapers such as the Financial Times and others over the discrepancy which exists between the short and long term interest rate in that country which has no explanation according to the current state of theory.

Prof. Ormerod does us all a great service in exposing the tottering edifice that is modern economics to criticisms which go back at least one hundred years. There are many voices in the wilderness from Austrians and Institutionalists among others who have shown the inadequacies of the formalist approach but who have been ignored by the vested interests of the economics profession who, like priests of an empty religion, maintain that only the true believer can enter the gates of paradise.

Ormerod does great service in opening up some of the basics to this critique in a form which a reasonably educated person may understand. Those working in the field of "Complexity" will know of the difficulties of the mathematical tools in use but which nevertheless have a tremendous applicability in today's world. I resent the description of the text as repetitive. To a degree it has to be if the general public are to keep up with the argument but the same material is not gone over and over again.

I suspect that many who are unhappy with this little book have somewhat of a vested interest in maintaining economics as a so-called science, although to me economics resembles light in that whereas light may be viewed as particle or wave, economics may be viewed as science or art. Many who owe economics for their daily bread migght be at risk if Ormerod's work has the validity he claims. What does it profit a man if he gains the whole world but suffers the loss of his own soul? Ormerod's work is a threat to the structure which has assumed for itself the mantle of the keeper of the sacred flame of policy prescription.

For that reason alone everyone interested in any aspects of economics or business or politics or public policy-making may want to read this book with care. In a way it is as revolutionary as the work of the neo-classical economists of the 19th century, in another it is one of the most radical threats to economics ever.
6 of 7 people found the following review helpful
(4+) The Importance of Feedback and Chaos in Economic Theory 25 Mar. 2004
By Tucker Andersen - Published on
Format: Paperback
This book consists of a discussion by Paul Omerod of the obvious failings of conventional economic theory. He has attempted to utilize a framework understandable to members of the general public; in some respects, the author succeeds admirably in his attempt but as he himself comments in the introduction, on occasion simplicity is sacrificed to the necessity of incorporating complex mathematical models and statistical constructs (with the most advanced math thankfully relegated to the appendices). Omerod's conceptual framework is that mechanistic notions of the economy (and social analysis in general) may have been necessary simplifications in the past given the limited experimental research done in many areas and the lack of computational power on the scale available to us today, but they are at best useless in today's increasingly interdependent world and in fact often are counterproductive. The book posits that "economies and societies are not machines. They are more like living organisms. Individuals do not act in isolation, but affect each other in complex ways." Thus, BUTTERFLY ECONOMICS is meant to capture the author's view of society as a living organism; the conclusion implicit in this conceptualization is that the inherent unpredictability of economic systems means that governments' attempts to "manage" short term economic fluctuations are completely misguided .
This text is a well developed exposition of a very important topic that deserves to be better understood, and I found myself frequently writing notes in the margin and underlining worthwhile facts and ideas. I highly recommend the book for readers interested in a systematic critique of conventional economics, especially the extreme reliance on inappropriate mathematical modeling and the often misplaced faith in such models by politicians and their agents. The author's conclusion is that the ability of governments "both to make reasonably accurate forecasts and to understand the consequences of policy changes designed to alter the outcome is largely illusory". Since this conclusion corresponds with both the empirical data that I have observed and my philosophical inclinations, I was very pleased with the coherent argument which this book presents. Nevertheless, I felt that the framework which he used in attempting to provide an aura of scientific rigor in support of his premise was both a little distracting and left the book open to the charge of being simplistic (although that would paradoxically mean that the systems are even more complex than Omerod claims). While the title utilizes the butterfly analogy popularized by chaos theory and probably thus attractive and recognizable to readers, his book actually extensively relies on a model based on studies done of ant populations in order to incorporate both the notion of biological models and also scientific knowledge concerning the complexity of modeling the activity of interacting agents and the counterintuitive results that often occur. Thus the book should more accurately be subtitled, HOW DOES ANT BEHAVIOR ILLUMINATE ECONOMIC PRINCIPLES.
The final chapters of the book examine why long term growth is apparently fostered by capitalist industrial economies with a large free market component but not under other types of economic systems, and why private businesses are much better at creating jobs and wealth than are governments (which provide the necessary macro-environment). His explanation is in contrast to the concept of "growth factors" or "positive externalities" so often adopted as explanatory factors in economic literature. And he accurately distinguishes between short and long term predictability, and between fluctuations which simply represent random noise as opposed to significant deviations from trend. Adaptation and evolution are necessary elements of any cohesive theory, but devilishly difficult to accurately incorporate into models with any degree of predictive accuracy.
While I found this book illuminating and certainly believe that our economies would benefit and growth would be enhanced if its insights were more widely understood (especially by politicians or more importantly their constituents), I do have some criticisms. First, it seemed strange to me that either Omerod was not familiar with or didn't acknowledge the contribution to the conceptual framework which he espouses of Michael Rothschild. Rothschild's book BIONOMICS:ECONOMY AS ECOSYSTEM comprehensively discussed the biological analogy which Omerod finds so convincing. Second, while a topic somewhat peripheral to this book, he also does not discuss the recent advances in experimental economics (as evidenced by the award of the Nobel Prize to Professor Vernon Smith) and the insights which this discipline might provide to the development of his theory. Third, he attempts to accomplish both too much and too little in the book. I think the theoretical statement and implications should be more completely delineated rather than organizationally being so completely interwoven with what is essentially just explanatory and supporting detail. Fourth, he falls into the common trap of assuming that most economic statistics are in fact a good approximation of reality, when many times subsequent restatements cast doubt on their accuracy. Last, in Chapter 5 he uses an incorrect illustration which shows that his academic training is not in mathematics. When discussing what is referred to as the Monty Hall problem (from the game show), he gives the wrong answer to what he admits is a very simple problem. Thus he inadvertently illustrates how important the correct statement of any problem is in arriving at the conclusion. The simple answer is correct, but he rejects it because he doesn't understand conditional probabilities and antecedent events in the illustration utilized. (Someone in England has clearly published an incorrect article on this subject, since quite surprisingly the exact same explanation was also used incorrectly in THE CURIOUS INCIDENT OF THE DOG IN THE NIGHT TIME, another book by a British author.)
As Mark Twain observed, the difference between fact and fiction is that fiction has to be plausible. I recommend this book if you are interested in differentiating real facts from plausible fiction. My only caveat is that it is not a fast or easy read.
Tucker Andersen
6 of 7 people found the following review helpful
Butterfly means biology here 24 Mar. 2004
By Professor Joseph L. McCauley - Published on
Format: Paperback Verified Purchase
In his first book „The Death of Economics", which I still like very much because I found it useful, Paul Ormerod compared in detail the gross failure of the neo-classical equilibrium model, the standard textbook model, compared with economic data. The book did not waste time on philosophy or ideology but presented a criticism that was and remains valid. „Butterfly Econonomics" takes a different tack. I recommend reading at least the first half of „The Death of Economics" first, followed by this one. One must first know what is the problem before one can appreciate the solution.
In the preface, Paul Ormerod apologizes mildly to neo-classical economists and expresses hope that this new book should be easier for them to stomach. He knows, as we all do by now, that that school of thought does not take kindly to criticism. His expressed aim is to concentrate on complex, biological models instead of mechanical ones. In the Introduction, he announces boldly that he will abandon the idea of fixed preferences, an admiriable task! The ‚butterfly` symbolizes not deterministic chaos (the theme of the second half of his first book) but rather the ability of a biological system to interact, adapt and learn. The author`s aim is to understand the two main problems of economics: (1) Why is there economic growth, and (2) why are there business cycles?
Complexity as the edge of chaos is alluded to, but the main point of chapter 1 is to introduce the reader to Alan Kirman's ant model, a variation on Brian Arthur's urn model. Here, the emphasis is on modelling the interaction of agents, or ‚agent-based modelling`, and Paul does a fine job of explaining the ant model. One wonders, as one reads the book, why econ texts are not written in such stimulating fashion rather than presenting us with a theory that doesn't work. Neither Kirman nor Ormerod present the ant model as solving any economic problem quantatitively, rather, it is discussed in the spirit of showing what is left out of ‚optimizing behavior`.
In chapter 2, Paul explains why we should give up hope of short term prediction, and criticizes the efficient market hypothesis (EMH) for its failure to allow for adequate volatility. I'll come back to this and some other points below. The third and fourth chapters discuss crime and family values in terms of the personal perferences of interacting agents. Again, this stimulates the reader to imagine how one could write an econ text to make it meaningful.
Chapter 5 mentions Radner, whose work (along with Kirman`s) every econophysicist should know. Roy Radner is the theorist who drove all the nails in the neo-classical theory coffin back in 1968. He showed that if uncertainty is introduced into the neo-classical equilibrium model then the agents can't locate equilibrium, so that no trades are made. In other words, uncertainty makes the model's economic eficiency plunge from 100% to zero, which is a more realistic model of the Third World (the equilibrium model is not an empirically realistic model of any real market).
In the sixth chapter, business cycle forecasting is introduced and (pre-EU) the question is raised whether Italy can meet the fiscal requirements necessary to enter the European monetary union. I read about the way that Long Term Capital Management helped Italy to solve this problem via ‚creative financing` in Dunbar's „Inventing Money". Chapter 7 discusses the failure of econometrics to extract fixed rules of behavior (machine-like models, if noise-driven) from the data, and begins the discussion of the failure of the standard model (RBC, or real business cycle theory) to explain the data. Economists are correctly lambasted for ignoring empirical data in discussing the „correctness" of their models, and Paul's interesting new model of the GNP is presented in chapter 8. I found these chapters to be the most stimulating. There may still be something here for econophysicists to work on.
Interacting ants (variable preferences), the theme the entire book, are presented explicitly again in chapter 9. We`re informed of the neo-classical idea of a ‚production function`in chapter 11, and economists are again properly taken to task for what I would label as Aristotelian-style philosophic postulations, while roundly ignoring the available empirical data. I find the discussion of the production function to be very useful, because Paul presents it, as he presents everything, in clear, simple language. This saves me the trouble of having to read dense, rambling economics papers to learn about that idea, although another source is Mirowski's „More Heat than Light".
A very interesting thought is mentioned as a footnote on page 168, and I`ll leave it to the reader to ponder that one. In chapter 13, Paul further advises governments against too much regulation, no doubt having in mind his own UK before it was Thatcherized to the opposite limit (the US is presented as a happy counter-example, but since Reagonization we have our own severe unsloved problems). Here, the basis of his recommendation is the impossibility of accurate short-term predictions, something else for econophysicists to think about. It is true that short term prediction is useless in a stochastic system. In a deterministic chaotic or complex system, one sees only regular behavoir at short times (because of local integrability). I guess the point here is that the GNP can be modelled stochastically. But however correct ‚hands off` advice may be in many cases, I would point out that the fixing of the Thai Baht after Thailand`s financial collapse seems to provide a good counterexample to a complete ‚hands-off` policy. Also, the failure of Mexico to fix the Peso and refuse to pay international loans ca. 1997 caused nearly total economic collapse for the then-growing middle class there, who held unpayable floating mortgage loans. So there's a lot of grist here for the econophysical mill. Ending this fine little book, Paul Ormerod emphasizes the ant model as an example of „one variant of the overall complex systems approach which (is proposed) in this book". That model is claimed to be only an extension of neo-classical economic theory. Now for some comments, which I hope will prove useful.
First, I see no reason why neo-classical econmists should take any solace from this book (thank goodness!): the ant model doesn`t rely on utility maximization, and is in not an extension of their model. It doesn't begin by perturbing the neo-classical equilibrium model (as Per Bak did by adding noise in „Dynamics of Money"), and seems completely unrelated to optimizing behavior. However, the ant model, while interesting and instructive, also is not complex and so references to complexity, or to complexity as living the edge of chaos seem unnecessary. Physicists do not yet agree on a definition of „complexity", but I like Chris Moore's definition, where „surprises at every length scale"are the essence of complexity. This rules out scaling and attractors, and food sources in the ant model are analogous to attractors. Here's what Moore means, I think. Chaotic and „random"/stochastic systems are simple, by this definition, not complex: the statistics of the distant future for specific classes of initial conditions can be known in advance for chaotic or stochastic systems without doing a step by step calculation. For a complex system, in contrast, there are „surprises" that prevent one from knowing any statistical distribution at long times, for a given initial condition, other than by watching the system unfold step by step. In other words, the system cannot be characterized by any statistical distribution because ‚surprises` all the way to infinite time occur (volatility and fat tails are not examples of ‚surprises`). For my taste, mutations of bacteria and viruses to new forms are the essence of complexity, physically. This kind of complexity is presumably found in markets, but where and how? We don't know how to quantify that stuff.
Here's a more serious criticism. The idea of the EMH presented in the text is Shiller's notion, based on dividends discounted infinitely far into the future. This is not a useful definition because it's not falsifiable (Modligliani-Miller even teaches that dividends are irrelevant). The best definition of the EMH, the one used by finance theorists, is represented by the Martingale condition (plus, I would add, with Hurst exponent H=0), which guarantees that there are no patterns in the statistics that can be exploited for unusual profit. Markov proceses fall into this category, and have been used to describe financial market statistics, including option pricing, quite accurately (see my new econophysics book). So the EMH doesn`t rule out either fat tails or nonstationary processes, both of which are required to describe the observed ‚volatility` of financial markets.
Finally, the ant model is not really ‚biology` but is instead noise driven mechanics. Why is that? Every mathematical model that can be written down is a mechanical model. As Turing showed, mathematics is a mechanical process, so whatever can be mathematicized classically is classical mechanical, in some sense. Turing's famous typewritter tape is a classical mechanical system. More to the point, financial market statistics are very accurately described by simple noise-driven ‚mechanical` models. The only known way to get away from fixed-machinery models (fixed hardware and fixed software) is to go to a neural net model that can learn from the environment, so that the connections change with time. The neural net may even be deterministic, but interaction with the environment prevents us from knowing the future, even theoretically. Finally, there is a reference to ‚value` in the text. I have described elsewhere why ‚value` is nonunique and therefore is an ill-defined notion.
In context, these are pretty minor criticisms, and to answer them properly (excepting the EMH error) one could not write an elementary book. So I think, in the end, that Paul Ormerod has done a fine job of using the ant model to symbolize what's missing in the standard, boring econ texts. Again, reading this book made me think how an econ text could be written to stimulate the reader to think about solving real, empirically-driven econ problems, and if Paul doesn't do take on that arduous task then someone else eventually will. If you want to read less than the entire book, then I strongly recommend chapters 1, 7, 8, and 12. The RBC and Paul's model of business cycles are presented for the reader's convenience as appendices.
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