June 28, 2016

Presentation at CEF 2016 in Bordeaux

I presented my paper Seemingly Equivalent Firm Decision Heuristics (the slide deck) at the Computating in Economics and Finance Conference (CEF 2016), with some of the best-known computational economists in the audience, including Jean-Philippe Bouchaud, Herbert Dawid, Christopher Carroll, Matteo Richiardi and Blake LeBaron. Overall, the paper was well-received despite its limited scope (or maybe exactly because of it :) ).

The paper is about an often overlooked detail in agent-based economics models, namely how firms should calculate their dividends. To summarise, dividends should be larger than profits when a firm is larger than optimal, and smaller than profits if the firm wants to grow. This sounds like common sense, but many existing models unfortunately do not adhere to this. Also, there are a few subtle details - for example the question of how exactly to measure revenue - that can make the model more or less stable. In extreme cases, the simulation breaks down in economic chaos even though the chosen dividend heuristic is correct in equilibrium.

As an overall take-away from the conference, agent-based modelling seems to gain traction, but is still far away from realising its potential.

“In using systems of adaptive agents to create a ’guess’, we are counting on the tendencies of these systems of adaptive agents, as plodding as they are, eventually to find their ways to equilibria that we economists (who, after all, made up the model!) have difficulty finding.”
Thomas Sargent in 'Bounded Rationality in Macroeconomics'