Tag Archives: social interactions

Homo economicus is (mostly) dead

Source: Economists.com/blogs/freeexchange.

Source: Economists.com/blogs/freeexchange.

Do I detect a change in the winds of mainstream economics?

A recent article in the Economist gives me hope. It suggests that ideas of non-rational, adaptive, and distributed decision-making – which have been topics of research in agent-based modeling, psychology, neuroscience, anthropology, and behavioral economics for some time – are now starting to seep into the consciousness of mainstream economics.

Describing Daniel McFadden’s recent work titled “The New Science of Pleasure“, the article details how concepts from psychology, such as prospect theory, are casting renewed doubt on the validity of mainstream economics’ hallmark theory of consumer choice. Indeed, mainstream economic theory has come under fire recently in the wake of economic recession stemming from “irrational” financial decisions, which many economists failed to predict or reconcile with their models and theories.

In all fairness, many mainstream economists would readily offer that their models are unrealistic in many ways, and are useful for understanding how economic systems tend towards rationale outcomes in the long-term. True enough. What this article argues, however, is that the assumptions that underlie mainstream economic models and theory can also lead to unrealistic worldviews and policy recommendations.  For example, ‘more choice is good’, but sometimes this can lead to sub-optimal (i.e. not rational) choices because the consumer is overwhelmed with options. From the article, “Explicitly modelling the process of making a choice might prompt economists to take a more ambiguous view of an abundance of choices.”

And this line of reasoning leads to agent-based modeling as a potential tool to understand how choices are made: what psychological elements influence decisions, how those psychological influence vary with individual heterogeneity characteristics, and how decisions are enacted into behavior.

A parting shot from the article: “This is undoubtedly messier than standard economics. So is real life.”

Agent-Based Models in the Real World

thought_process1A recently published News Feature in Proceedings of the National Academy of Sciences by Robert Frederick, titled Agents of Influence, discusses the advancing state of agent-based models (ABMs) and their growing use to inform business and policy decisions. Businesses are employing ABMs to find new efficiencies in complex supply chains, and research efforts to create million-agent models of the economy may soon offer insight into the dynamics of our financial systems and broader economy.

What I like most about this article is that it illustrates how ABMs and complexity thinking are beginning to make their way out of academics and into the real world. A recent example is how Southwest Airlines used ABMs to find more efficient cargo shipping routes, saving the airline millions of dollars. ABMs as virtual laboratories are getting attention, too. The article describes how these models enable decision-makers to explore the consequences of particular business or policy decisions though a range of possible scenarios.

The message is clear: representing heterogeneous, distributed decision-making creates more realistic models, and is enabling researchers, businesses, and policy-makers to navigate complex systems like never before.

Importantly, Frederick does not shy away from the limitations of such models. What is gained in realism by using ABMs often comes at the cost of having to make numerous simplifying assumptions about human behavior. After all, an ABM is only as good as its description of human decision-making processes, which are notoriously unpredictable.

A great closing quote: “Ultimately, … none of these [ABMs] will offer iron-clad predictions, because they have to make simplifying assumptions about human behavior. The true test will be whether those assumptions, and the resulting outputs of the models, convince policymakers to act on their advice.”

About the Agent-Based Virutal Labs (ABVLs) blog

Welcome to the Agent-Based Virtual Labs blog!Landscape_fig

This blog will cover issues relating broadly to the social, economic, and cultural interactions that are  changing the planet’s surface and climate. In particular, these issues will be explored with posts relating to agent-based modeling (ABM), and how ABMs can be used as virtual laboratories to ask questions about peoples’ motivations for observed behaviors that would be impossible to ask any other way. Along the way, topics informing the creation, use, and testing of ABMs will be included, as well as my areas of application of ABVLs such as land-use change, livelihoods in developing countries, and sustainability.

This blog will also be a hub of information for those interested in ABMs or my subject areas of interest. Following the navigation menu will lead you to collections of links for learning and teaching resources, other ABVLs-relevant blogs, and my research topics. Also, at regular intervals, posts will appear that contain an annotated list of links dedicated to topics ‘trending’ in the ABVLs world.

I hope you enjoy and please drop me a line!