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 now have a variation on our housing model is used by, I would say about six or eight central banks in Europe. There is now an agent-based macro model being used by the Bank of Canada, being developed at the Bank of Italy. So we're starting to get traction in that domain. And I've started a company called Macrocosm that is dedicated to scaling up the solutions and reducing the practice.
So, you know, if a journalist calls me and said, what's going on and, you know, what's going to happen with the war in Ukraine, I just look at what the model is doing because it's ingesting the inputs all the time and staying up to date. And so we were starting to see practical applications. And my theory of change is that
Once those practical applications get enough traction, and once, you know, as economists will say, it takes a model to beat a model. Once our models start beating their models in hard empirical terms, they'll have to start paying some attention.
Yeah, yeah. Well, sometimes, let me correct that a little bit. If you think it's cool and you're within the main paradigm, you can get a paper published because it's cool. But if you're outside of the main paradigm, no matter how cool it is, they're not going to pay attention to you until you have empirical results.
Well, I mean, I think it is inevitable there will be one. You know, you just look through the history of economies, they happen regularly. Before we instituted the Federal Reserve in 1913, the US on average had a financial crisis of some form about every seven years. And now, since we did the Federal Reserve, They're less frequent, but the ones we've had have been doozies.
We have the Great Depression and the Great Financial Crisis. We've had some whoppers. So we still don't know how to control the economy properly. And until we do, we should expect we're going to have crashes.
And it could even be that the way we're controlling it works well most of the time, but when it fails, it actually makes a bigger crash than would have happened in the old days, where we weren't really controlling much of anything. other than doing weird stuff with the metal we used to base the currency on, which was pretty arbitrary. So, yeah, I think we are going to have more crashes.
Now, I do think that agent-based models can help guide us better. And maybe once we get good models, we can soften the intensity of those crashes. or maybe even just to understand how to keep them from occurring. I don't know. The jury's out, but I'm optimistic.
Yeah, definitely. One of the things I talk about in my book is what I call market ecology. The classic theory of markets that's dominated a lot of the discourse is efficient market theory. And the idea is that you can't beat the market, but also, so that's informational efficiency, but also is allocational efficiency. The allocations of effort we're making to different activities are correct.
And the market's pretty informational efficient. I managed to beat it. We managed to beat it at Prediction Company by a pretty steady rate. Odds that we were just lucky monkeys are so close to zero as to be negligible. But the allocations can be quite wrong. And that's what happens in crises. And so...
So under the theory of market ecology, it's like the theory I said before about the production system and the real economy, but The way you think about it is there's different species of investors and they're all specialized. Warren Buffett does his thing. There's another guy, John Henry. He's a trend follower.
He says if the market's been going up, it'll keep going up and looks at little patterns in the prices to decide when to buy and sell. You know, they're market makers. You can make a list of, I can easily write down 15 or 20 different types of strategies in financial markets. And While there's variation in how people execute those strategies, they're broadly, it's like species and biology.
And so under the theory of market ecology, we need to think of the market as an ecosystem with specialized actors. They feed off of the inefficiencies in the market. They are what's making the market efficient, but they never achieve perfect efficiency. We see swings around perfect efficiency, particularly when new stuff happens.
You know, mortgage-backed securities are only one of several examples of new financial instruments that caused bad stuff to happen in markets. And so under that theory, you can then simulate what's going on in markets and understand why markets malfunction. The efficient market theory assumes they work perfectly, so it doesn't give you any insight into why they malfunction.
It's like the poor old balancing In efficient market theory, it's always straight up. If you want to understand why it deviates from straight up, you have to do something else. And I maintain theory of market ecology is the key. And so that then will allow us, one of the things, to back to your question, regulators, I argue, should be simulating the market.
They have all the data to understand the species and who they are and how they interact because they can see what everybody does. And so we could have a standard simulation of markets, and whenever a new financial instrument comes in, we put it in there. It's like an invasive species in ecology, and we test it out to see what its side effects are.
And if we were doing that leading up to the great financial crisis, we would have seen the side effects of mortgage-backed securities used with high leverage.
Well, I'm actually trying to convince the SEC because central banks, as a central bank, you only see your part of the story. You know your positions. You don't know what everybody else is doing. But the SEC can look at anything it wants to. and does whenever something goes haywire. Okay, that makes sense.
So the data could just be flowing in, they could be simulating what's happening, and they could be doing counterfactual experiments. So do we need to be worried about leverage getting too high here? Crank it up. Oh, wait a minute. We got to get people to lower their leverage.
Yeah. Well, they've certainly been helped by that. You know, in my career, I've always had the problem that I never fit into any discipline. So I'm one of the most interdisciplinary people around because I've straddled disciplines without being in one. through my whole career. And by the way, you said, oh, you're at Oxford, but actually I'm in the Department of Geography and the Environment.
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