Posts Tagged ‘neoclassical’
Axelrod (1984) made a major contribution to Game Theory in his book “Evolution of Cooperation” but thirteen years later he, dissatisfied with game theory, moves onto agent based modelling to rework his view of cooperation in his book in 1997 “The complexity of Cooperation: Agent-based Models of Competition and Collaboration”. In a similar move, the Santa Fe Institute in the US was established in 1984 to grapple with complex social issues and used agent based modelling amongst other techniques to “collaborate across disciplines, merging ideas and principles of many fields — from physics, mathematics, and biology to the social sciences and the humanities — in pursuit of creative insights that improve our world”. Additionally, the EU acknowledges the failure of traditional economics so adopts agent based modelling.
Agent based modelling captures the interaction between agents to simulate emergence whether at the physical or social level. NetLogo provides an extensive library of simulations of both physical and social emergence that shows the diversity of application of agent based modelling. These sample simulations can be readily tailored to meet the needs of social scientists. The software is free and there is a thriving enthusiastic community support group.
Why is there a move by a prominent game theorist, the Santa Fe Institute and the EU to agent based modelling? The article Game Theory as Dogma by Professor Kay (2005) discusses ample reasons to search for alternative techniques to model competition and collaboration and emergence in general. For instance,
The trouble with game theory is that it can explain everything. If a bank president was standing in the street and lighting his pants on fire, some game theorist would explain it as rational. (Kay 2005, p. 12)
Helge Nome : The key to controlling humans does not lie in building fences around them, but to steer their minds away from unwanted questions.
The elimination of courses in the history of economics has contributed to the Global Financial Crisis (GFC) by eroding institutional memory that allowed the dismantling of structures designed to prevent a re-occurrence of the Great Depression. With little space in the curriculum for reflection on the past, graduate economists feed on a diet of neoclassical mathematics produces an extreme form of bounded rationality where history is both irrelevant and unknown, which makes for a very powerful ideology by steering minds away from unwanted questions. Read the rest of this entry »
Real Business Cycle (RBC) and Rational Expectations Hypothesis (REH) contributing to the Global Financial Crisis (GFC) and the Dynamite Prize
This article discusses how neoclassical economics has contributed to the Global Financial Crisis (GFC). In particular, how two neoclassical theories, the Real Business Cycle (RBC) and the Rational Expectations Hypothesis (REH) contributed to the GFC and how these theories are false and unscientific.
Edward C. Prescott and Finn E. Kydland were awarded the 2004 Nobel prize in economics for their work in developing the RBC and Robert E. Lucas Jr. was awarded the 1995 Nobel prize in economics for developing the REH. They have been nominated for The Dynamite Prize in Economics that is to be awarded to the three economists who contributed most to enabling the GFC. The Dynamite Prize in Economics nominates Prescott and Kydland ‘for jointly developing and popularizing “Real Business Cycle” theory, which by omitting the role of credit greatly diminished the economics profession’s understanding of dynamic macroeconomic processes’ and nominates Lucas for ‘his development of the rational expectations hypothesis, which defined rationality as the capacity to accurately predict the future, both served to maintain Friedman’s proposition that monetary factors do not affect the real economy and, in the name of “rigor”, distanced economics even further from reality than Friedman had thought possible.’ Read the rest of this entry »
G8 or G20 Protests and Computable General Equilibrium (CGE) modelling and its Dual Instability Problem
This article discusses why Computable General Equilibrium (CGE) models are important to the G8 or G20 protests and why CGE models are unsuitable for policy analysis for the following two reasons, CGE lacking microfoundations and the dual instability problem.
First, why are CGE models important to the G8 or G20 protests? An example of a global CGE model is the Global Trade Analysis Project (GTAP 2009) coordinated by the Centre for Global Trade Analysis, Department of Agricultural Economics, Purdue University. GTAP (2009) claims that their model provides a common language for global economic analysis; they cite the use of GTAP in three of the five quantitative studies at the 1995 conference of the WTO’s Uruguay Round Agreement and in virtually all the quantitative work for the 1999 Millennium Round of Multilateral Trade. This example indicates the credibility and perceived importance of CGE. Read the rest of this entry »
Capital Asset Pricing Model (CAPM) and Efficient Market Hypothesis (EMH) Contributing to the Global Financial Crisis (GFC)
The Efficient Market Hypothesis (EMH) and Capital Asset Pricing Model (CAPM) are a framework and standard financial tool, respectively. Together, they provide a worldview for financiers and determine their decision-making in the financial markets.
Fama (1965; 1970) introduces the EMH in three market efficiency levels: a strong level where all relevant information regarding a stock is fully reflected in its price; a semi-strong level where all publicly available information is reflected in its price; and a weak level where current prices reflex all past history of the prices.
Fama and French (2004, p. 25) note that CAPM of William Sharpe (1964) and John Lintner (1965) marks the birth of asset pricing theory (resulting in a Nobel Prize for Sharpe in 1990). Four decades later, the CAPM is still widely used in applications, such as estimating the cost of capital for firms and evaluating the performance of managed portfolios. It is the centerpiece of MBA investment courses. Indeed, it is often the only asset pricing model taught in these courses. Read the rest of this entry »
Hormonal Male Traders producing a Momentum Effect contrary to the Efficient Market Hypothesis and Rational Choice
Coates and Herbert (2008) study the role of the endocrine system in financial risk taking in a group of male traders in London. They find a positive relationship between a trader’s testosterone level and his daily Profit and Loss (P&L) and between his cortisol level and financial uncertainty, being measured by variance of economics returns and expected variance of the market. They note that rational choice is affected by the levels of the hormones. The more profits the trader made relative to his daily average the higher his testosterone became. Heightened testosterone increases a trader’s preference for risk. The process has a positive feedback, producing a financial variant of the “winner effect”. Additionally, short periods of high volatility increase a trader’s cortisol levels, which increase his motivation and his ability to focus, producing a euphoric feeling. However, prolonged period of elevated cortisol levels produce selective attention on mostly negative events and anxiety, reducing a trader’s preference for risk. Even if the number of traders is small, these hormonal effects could reinforce the momentum effect and cause markets to deviate from rational choice and the predictions of the Efficient Market Hypothesis (EMH). Read the rest of this entry »
“This long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”
— John Maynard Keynes
A Tract on Monetary Reform (1923), 80.
Traditional economics has failed to predict the knock on effects of the financial crisis says the EU. The Eurace project is designed to remedy this failure, which uses an agent based modelling methodology as an alternative to the rational representative agent model that is a cornerstone of neoclassical economics. The post Progressing from game theory to agent based modelling to simulate social emergence further discusses agent based modelling. Read the rest of this entry »