Doyne Farmer
speaker
145 appearances
1 recordings
1 series
first heard Oct 2024
last heard Oct 2024
Doyne Farmer’s voice in public audio — every appearance, attributed to the second.
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We actually explicitly said after that, all bets are off and we're worried about it. So now you want to bring inflation and you've got to have agents making decisions because they're looking ahead going, oh, are we going to have inflation? What's happening? What are interest rates doing? They have to be thinking about all that stuff.
Now, but as I said, in an agent-based model, we kind of come at it from the other end. We usually start simple. Like I have models where the agents actually just flip coins to make decisions. So they're literally zero intelligence agents. And Those models can be quite useful. They have made useful predictions.
For example, if you want to predict how the bid-ask spread in a financial market, that is the difference between the buying and selling price, how does that depend on the way orders are flowing into the market? You can calculate it with a zero intelligence model. The orders flowing in could be sand grains coming in at random. But you quickly realize, oh, no, we need to refine it.
You now need to make something a little more realistic like, So value investors buy undervalued assets. So several different agent-based models where the rule is, this guy's the value investor or investors. And what do they do? They have some way of valuing the asset. When the valuation's under the price, they buy it and hold it. When it's over, they sell it. And so...
rules, simple rules like that. I have other models where, you know, back to business cycles and poll balancing, we assume a network of agents who are really, really dumb. All they do is look at their neighbors to see what their neighbors are doing. And the neighbor that's consuming the most in that period, so myopic consuming the most, they go, I'll adopt that savings rate.
So they all have different savings rates. They're all adopting different savings rates. And by the way, back to the instability in the economy. If you save too much, the economy doesn't work. You've got to strike the right balance because again, to sell stuff, you've got to have consumers to buy the stuff. And those consumers then have jobs doing something that allows them to sell stuff.
So you're going around that loop all the time. The balance is somewhere in the middle. So amazingly, as long as these agents don't update their strategies too often, the economy actually spontaneously starts oscillating because
Agents are changing their savings rates dynamically, but also almost, to me, almost more amazingly, they get pretty darn close to the optimal savings rate, even though they're absolute dummies. And selection's doing all the work. You see, because you're selecting toward the agent that consumes the most, they're chasing that agent.
Now, that agent might be on a spending spree and about to go bust, so it's not perfect, but they get within... No, a few percent of the optimal strategy. So anyway, a bit of a tangent, but just to illustrate the kinds of things we do to have the agents make their decisions.
And then the key point is that not only do we think that can be more realistic in many settings, it can capture dynamics more naturally because you can see the deviations from the imperfections of the economy, but it's tractable. So we can run simulations with millions of agents instead of being stuck with just a few.
That's right. But let me emphasize, we also have supply and demand and inflation. Okay, sure. Because those agents make supply and demand happen, right? And that's in the oscillations we're seeing, they may be oscillations where there's more supply than demand or more demand than supply.
And in some markets, you know, some markets saying supply equals demand, not a bad approximation over sufficiently long timescale. In other markets like housing markets, supply and demand can be wildly out of balance. And it goes back to the way prices get formed in housing markets. You know, if you bought a house, What do you do? You go find a comparable house.
You go to a real estate agent who says, here are some comparable houses. You know, you would just tweak it up or down a little bit. You try and sell your house at that price. It doesn't sell, you mark it down, doesn't sell again. After a month or two, you mark it down again. Maybe at the end you go, I don't want to sell my house. This is too cheap. And you pull it off the market.
So there in housing markets, you can see supply and demand imbalances that are more than an order of magnitude. And you can see, like you go through the housing crisis, we flipped from a market where there was a huge excess of demand to a market where there was a huge excess of supply and prices are responding very sluggishly to that, those much more.
And you can't capture that in a mainstream model because you can't write it down in an equation simply.
Yeah, so let's be a little more precise there. Okay. In macro, that's more or less true, though these days a hot topic in macro is having heterogeneous agent models where you have things like a Gaussian distribution of agents, just one-dimensional Gaussian, with some agents, say, having more earning power than others. Okay. Right? Right.
Okay, so they're putting that in, but in our models, what do we do? We create a synthetic population with a million agents where we try and match all the demographics, earning power, education, age, even race and gender. And so we match all those characteristics of the population. We can even do it regionally. So it may vary.
So we have the power because we can have millions of agents to really make all this much richer and much more accurate.
Yeah, yeah. So mixing together a couple of metaphors there, but in a good way. Yeah. What does the economy do for us? So first of all, you know, when I wrote my book, I realized it made me appreciate the economy more because I really tried to reflect on what is this thing doing for us? And I would argue it's like, it's the digestive system of civilization, the metabolism.
It takes in, just as our metabolism, what does it do? We take in food, right? from the outside world, we reform that food, we break it into pieces and we make it into something else. What does the economy do? It takes in natural resources and then combines it with labor and we reform it into goods and services that we consume or that other industries consume. So it's the engine at the bottom.
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