Agent-based computer models could anticipate future economic crisis

Physorg.com - November 25, 2008

As the stock market continues its dive, economists and business columnists have spilled a lot of ink assigning responsibility for the ongoing financial calamity. While hindsight might be clear as day, researchers at the U.S. Department of Energy's Argonne National Laboratory are trying to create new economic models that will provide policymakers with more realistic pictures of different types of markets so they can better avert future economic catastrophe.

Traditional economic models rely heavily on "equilibrium theory," which holds that markets are influenced by countervailing balanced forces. Because these models assume away the decision-making processes of individual consumers or investors, they do not represent the market's true internal dynamics, said Charles Macal, an Argonne systems scientist.

"The traditional models don't represent individuals in the economy, or else they're all represented the same way – as completely rational agents," Macal said. "Because they ignore many other aspects of behavior that influence how people make decisions in real life, these models can't always accurately predict the dynamics of the market."

Macal and his Argonne colleagues have created a new set of simulations called "agent-based models" to better anticipate how markets behave. These new models rely on information gleaned in part from surveys that ask respondents about the factors that influence the way they make decisions. By gaining a more precise understanding of the behavior patterns of individual actors in a market – for example, how willing they are to accept risk, how strongly they value the future or how much time and effort they are able to spend making decisions – researchers and economists can better predict and avoid meltdowns.

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