The Map and the Territory: Risk, Human Nature, and the Future of Forecasting

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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 ...

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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 Very often, however, we’re steering by out-of-date maps, when we’re not driven by factors entirely beyond our conscious control.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.

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Editorial Reviews

From Barnes & Noble

In a sense, Alan Greenspan has always been in the prediction business. As a young man, he was an "adequate" professional musician, but he looked for an exit when he saw "one thing": "that the big band business was fading." Much, much later, as the long-running (1987-2006) Chairman of the Federal Reserve, he became the most frequently accused culprit of the most embarrassing prediction failure in post-war American history: The Great Recession. In this far-reaching study, he tackles questions about how we evaluate questions about forecasting economic risk and how, with cutting-edge technologies, we can learn to predict it better. A major exploration; certain to receive front-page reviews.

The New York Times Book Review - N. Gregory Mankiw
Greenspan's new book lays out his worldview in light of the financial crisis, the deep recession and the meager recovery of the past five years. His critics often condemn him as an ideologue, but the book demonstrates the unfairness of that accusation. On a wide range of topics—from monetary, fiscal and financial policy to productivity, inequality and globalization—he offers readers a thoughtful, nuanced and open-minded perspective, tempered by many years of having seen both business and public policy from the inside…Whether or not you're an economist, you can't help coming away from The Map and the Territory with greater insight into many of the crucial issues facing the nation…[and] you'll understand why five American presidents turned to [Greenspan] and made him one of the great economic policy makers of our time.
The Wall Street Journal - Burton Malkiel
The Map and the Territory is a model of expositional clarity, with complex and recondite matters made accessible to the lay reader. The book should be must reading for anyone interested in the way our financial markets work—and sometimes fail to do so.
The New York Times Book Review - N. Gregory Mankiw
The book offers much wisdom….[Greenspan] sees the world through a different set of eyes than do many others in his field. He is driven less by theory, more by data and practical experience….Greenspan's new book lays out his worldview in light of the financial crisis, the deep recession and the meager recovery of the past five years. His critics often condemn him as an ideologue, but the book demonstrates the unfairness of that accusation. On a wide range of topics — from monetary, fiscal and financial policy to productivity, inequality and globalization — he offers readers a thoughtful, nuanced and open-minded perspective, tempered by many years of having seen both business and public policy from the inside….Whether or not you're an economist, you can't help coming away from 'The Map and the Territory' with greater insight into many of the crucial issues facing the nation. Greenspan's path to fame may have been unconventional, but after reading this book, you'll understand why five American presidents turned to him and made him one of the great economic policy makers of our time.
Library Journal
The crash of 2008 blasted the old models of risk management and economic forecasting right out of the water, and Greenspan, former chair of the Federal Reserve Board, was as surprised as anyone. Here he considers the history and future possibilities of economic prediction.
Kirkus Reviews
Former Federal Reserve Board chairman Greenspan (The Age of Turbulence: Adventures in a New World, 2007, etc.) lightens up on free market orthodoxies to ponder the fact that people do not always behave, economically, as we wish them to--and neither do markets. The author has long espoused a kind of laissez faire–ism that assumes that markets are self-adjusting and guided by the enlightened self-interest of individuals. Even so, Greenspan warned darkly of "over-exuberance" in the market, a polite way of hinting that a bubble was about to burst. The author opens with the admission that, yes, some people behave with less than "rational long-term self-interest" when everyone else is clamoring for the wonders of high-tech and the South Seas. A touch late in the game, he also asserts that, since we know of our irrationality as players in the economic game, we should be able to build this flaw into our economic forecasting models and predict future crashes. Though much of the book is a rather technical discussion--it is the dismal science after all--of things such as risk aversion and time preference, Greenspan scores some important points along the way. We need, he suggests, regulation in the marketplace--just not the kind of regulation we've been getting. Further, many of our problems, though of an economic nature, are political and not strictly matters of the exchequer, meaning that political solutions are required if, due to the current political mood in Washington, not likely to be soon forthcoming. On a level both micro and macro, the author also notes that "[o]ne of the most fundamental propositions of economics is that advances in standards of living require savings," a bit of wisdom that we've all been neglecting. Sober without being dour and with a perhaps surprisingly optimistic conclusion. For policy wonks and readers with a grasp of basic economics, a refreshing re-examination of doctrine, reality and effect.
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Product Details

  • ISBN-13: 9781594204814
  • Publisher: Penguin Publishing Group
  • Publication date: 10/22/2013
  • Pages: 400
  • Sales rank: 516,790
  • Product dimensions: 5.90 (w) x 9.20 (h) x 1.40 (d)

Meet the Author

Alan Greenspan

Alan Greenspan was born in 1926 and reared in the Washington Heights neighborhood of New York City. After studying the clarinet at Juilliard and working as a professional musician, he earned his B.A., M.A., and Ph.D. in economics from New York University. In 1954, he cofounded the economic consulting firm Townsend-Greenspan & Co. From 1974 to 1977, he served as chair of the Council of Economic Advisors under President Gerald Ford. In 1987, President Ronald Reagan appointed him chairman of the Federal Reserve Board, a position he held until his retirement in 2006. He is the author of the number one New York Times bestseller The Age of Turbulence.

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    1. Hometown:
      New York, NY
    1. Date of Birth:
      March 6, 1926
    2. Place of Birth:
      New York, NY
    1. Education:
      B.A., M.A., and Ph.D. in Economics from New York University

Read an Excerpt

From The Map and the Territory by Alan Greenspan. Reprinted by arrangement with The Penguin Press, a member of Penguin Group (USA) LLC, A Penguin Random House Company. Copyright © Alan Greenspan, 2013.

Chapter 13


Not a day goes by that does not reveal deterioration in some aspect of our nation’s public infrastructure, followed by a call for immediate action. The average age of highways and streets, as estimated by the Bureau of Economic Analysis, has increased from sixteen years to twenty-five years since the early 1970s. To those of us who have to drive over our increasingly pockmarked streets, numbers shouldn’t be necessary. Sewer systems and public hospital buildings have aged similarly. Even our national parks are falling behind in maintenance.

But the most visible aging of government assets, and possibly the most consequential, is that of our military. Had we not had excess manufacturing capacity and infrastructure as we entered World War II, we could not have countered our enemies with overwhelming capacity to produce. The size of budget deficits that prevailed during the war was a measure of the extent to which we marshaled the savings of the private sector to help fund the purchase of war materials. But in order to get consumption down and savings up, rationing proved necessary.

Since the end of the war, the average age of military buildings and other facilities has tripled. If there is such a thing as a poster child of aged military equipment, it surely must be the fleet of B-52s, the long-range strategic bomber. It has a long distinguished history. As I wrote in 1952, “The long-range intercontinental bomber tasks will be in the hands of a new swept-wing eight-jet bomber now undergoing test—the B-52.” Its latest version, the B-52H, whose final production run ended in 1964, did yeoman service as recently as 2003 in Iraq. It is scheduled to remain in service beyond 2040. I am certain that there are innumerable current B-52 pilots whose fathers, and conceivably grandfathers, flew earlier models of this renowned aircraft. There are still eighty-five H models, fitted with modern avionics, in our active inventory.

The aging of naval ships has gained even greater prominence in the press. Our aircraft carriers are expected to have a fifty-year service life, and many of them are well up in nautical adulthood. I hesitate to include the USS Constitution (“Old Ironsides”), the oldest commissioned warship afloat, a wooden-hulled frigate celebrated for its exploits in the War of 1812. It is in a class of its own. It was first deployed in October 1797 and most assuredly is the most renowned piece of military equipment still in our inventory. Its propulsion system is identified by the navy with mock seriousness as 42,710 square feet of sail on three masts.

If “Old Ironsides” is the oldest naval vessel in our arsenal, the newest, scheduled to be delivered in 2015, is the aircraft carrier Gerald R. Ford, the first in the Ford class of carriers that are being added to the aging Nimitz and Enterprise class carriers. I can think of no more appropriate tribute to my old boss, President Ford, than to have a leading edge of our military power named after him.

The Abrams tank, the main battle tank of the army, is more than thirty years old, as is the Bradley armored infantry carrier. Much of the army’s equipment, however, is new, fashioned largely for its operations in Iraq and Afghanistan. Some of it, such as the large special trucks engineered to meet the devastation of roadside mines in many sensitive combat areas, may not be relevant in the future.

It is not quite clear, however, how important the aging is to our national security. It all depends on a forecast of who our enemies are going to be five to fifteen years from today. Most analysts believe that the probability of head-to-head superpower confrontations like those that dominated the first four decades following World War II is very small, but no one seems sure. Our military structure cannot significantly change quickly—the very long delivery lead times preclude it. But the type of military hardware we procure in the years immediately ahead will depend very much on our longer-term balance of power perspectives.

The issue of equipment aging divides military and political tacticians and will likely continue to do so for the intermediate future. I would hope that this debate is not resolved by another conflict in which American military capabilities are sorely tested.


The private sector has not been immune from the aging of infrastructure. Since the 1970s, the average age of manufacturing industry assets, for example, has increased from under eleven years to more than sixteen years. Similar aging is evident in wholesale trade, utilities, and air transport.

The share of private nonresidential buildings in real GDP has been in long-term decline since 1981, and those buildings are not being replaced, probably reflecting the slowdown in growth of the working-age population (fewer workers, fewer buildings), as well as the recent increased discounting since 2008 of expected incomes from very long-lived assets.


There can be little doubt that a major modernization of our infrastructure is long overdue. It is easy to demonstrate the time and motor fuel wasted in traffic jams owing to failure to keep road capacity growing in line with the number of vehicles on the road. But fixing the public infrastructure is no easy task. Funding is the major obstacle. Our fiscal position is daunting. To balance the budget, we need to raise revenue by a fourth or cut outlays by a fifth, or some combination of the two. We are unlikely to get close to balancing the budget even within ten years. Increasing federal outlays on infrastructure will increase the deficit (negative savings) and must be matched, ex post, by a comparable rise in savings less capital investment by households and private business or by increasing our rate of borrowing from abroad. To the extent that increased deficit spending curtails capital investment in other sectors, it is a depressant to economic growth in the short term and productivity in the long term. But unaddressed is the question of the effect of infrastructure on productivity. Rising outlays on infrastructure will, of course, increase nominal GDP, which, in turn, should increase the level of gross domestic private savings, but not nearly enough to be significant.

We are no longer the nation that we were coming out of World War II, which built a visible public (and private) infrastructure while still diverting a large part of our GDP to Cold War defense. We did it then by maintaining a savings rate out of household income of 10 percent. Today, as I’ve noted, that rate is in low single digits.


Our infrastructure deficiencies are part of a larger problem confronting the United States—the amount of our resources we set aside for contingencies. There are some inventories that sit unused for years—the Strategic Petroleum Reserves, for one. Some resources we produce stand idle for protracted periods and may in fact never be used: vaccine stockpiles for epidemics that never happen and dykes along rivers that never reach flood levels. By far our largest standby asset is, of course, our military.

Such assets serve as guarantees against, for example, foreign invasion, flu epidemics, tsunamis, and hurricanes, none of which are predictable and may never happen. They nonetheless require the building up of buffers of idle resources that are not otherwise engaged in the production of consumable goods and services. They are employed only if and when a crisis emerges. Such buffers address contingencies that range from uncertain but repetitive to rare and unpredictable. The former are insurable because they offer a reasonably steady rate of return to insurers. The latter are not.

Individual fires cannot be predicted, but they happen often enough for almost all cities to create and fund fire departments, whose cost is tantamount to insurance premiums. Health emergencies are not predictable but are also sufficiently repetitive to create health insurance, hospitals, and ambulances. The buffer may encompass expensive building materials (for example, special steels) whose earthquake flexibility is needed for only a minute or two every half century, or lightning rods that could be struck every month, or every decade.

The most visible insurables are life and property. I suspect that the higher the standard of living, the larger the share of GDP that originates in private insurance. Long-term uncertain risks have indeterminate probability distributions and are hence not insurable. Only risks on which actuaries can put a numerical probability are insurable. Risks that are highly variable imply too unstable a rate of return.

The choice of funding buffers is one of the most important decisions that societies must make, whether by conscious policy or by default. If policy makers, private and public, choose to buffer their populations against every conceivable risk, the nation’s current standards of living would, of necessity, decline. Funding such “investments” requires an increase in savings and, accordingly, a decline in immediate consumption. Resources can be put to active use or on contingency standby status, but not both at the same time. Buffers are a dormant investment that may lie idle and seemingly unproductive for most of their lives. But they are included in our total real fixed assets (and real net worth) statistics. It is no accident that earthquake protection of the extent employed in Japan, for example, has not been chosen by less prosperous countries at similar risk of a serious earthquake. Those countries have either explicitly or implicitly chosen not to divert current consumption to fund such an eventuality. Haiti, a very poor country, has not yet fully recovered from its 2010 earthquake. It had neither built a protective infrastructure like Japan’s nor has it had resources to recover on its own. Buffers are largely a luxury of rich nations. Only rich nations have the resources to protect their populations against events with extremely low probabilities of occurrence.

How much of its ongoing output should a society wish to devote to fending off once-in fifty or one-hundred-year crises? How is such a decision reached, and by whom? While the decisions of what risks to take remain predominantly with private decision makers, the responses to low-probability events such as the Japanese earthquake and tsunami of 2011 have been largely government scripted. Although formal data are not available to gauge the depth and quality of our standby buffers, the aging and deterioration of our fixed capital stock, both public and private, is ample evidence that a subclass of those assets, standby buffers, is also in a state of decline.

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