Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Agent-based Computer Models Could Anticipate Future Economic Crisis

27.11.2008
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.

Agent-based models separately calculate likely decisions for each individual actor in a model, then take the results of these decisions and see what impact they have on other agents. By doing so, they have the potential to foresee a panic, a protracted "hot streak," herd mentality or a number of other market phenomena that pure rational-actor models would tend to miss.

Macal and other Argonne researchers have valuable experience creating these agent-based models. At the request of the Illinois Commerce Commission, Macal's group generated a model of the Illinois electrical power market. As Illinois prepared to deregulate the electrical power industry in early 2007, policymakers in Springfield asked Argonne's Decision and Information Sciences Division to examine the likely effects of differential electricity pricing around the state and other issues associated with deregulation.

The model of the Illinois power network contained more than 180 plants and 350 generators, which supplied electricity to customers grouped into 30 "load zones." In all, the model contained thousands of points where producers and consumers interacted with each other and the power grid.

Because these agents have limited time, money and information, they cannot always reach the "optimal" solution dictated by traditional models, Macal said. "The old models assume that the entire system would always be trying to minimize its total cost," he said. "Obviously, in a deregulated market, that's not going to be the case."

The Illinois Commerce Commission wanted to make sure that if they deregulated the power market, individual producers of electricity would not be able to manipulate the market during times of high demand by withholding capacity or charging excessive rates. The Argonne model found that during certain times of heavy load such a situation could emerge, which led to the recommendation that independent monitors maintain some oversight of the power market.

The ability to produce such detailed simulations relies on the availability of high-performance computers that can handle the computational challenges of mathematically representing an enormous number of individual actors. "Just five years ago, we couldn't model more than a couple dozen agents," Macal said. "Now, we can do a couple million."

Macal's expertise in behavioral economics and agent-based modeling attracted the attention of Procter and Gamble (P&G), one of the world's largest producers of consumer products. P&G asked Macal to use models similar to those he used for the Illinois Commerce Commission to anticipate likely trends in consumer behavior. Macal's group used information from P&G's consumer surveys to create simulated shoppers who would react to changes in their marketing strategies and advertising campaigns.

In his efforts to further expand the reach of agent-based modeling, Macal plans to examine how and why Americans use different sources of energy – from coal to natural gas to nuclear to solar. While it might seem like a pipe dream to address a question with so many variables, Macal believes that he can at least shed some light on the country's patterns of energy production and consumption.

"At this point, there's no real framework to understand how all of the pieces of the energy puzzle fit together," he said. "These models will improve the quality of the information that policymakers and organizations use to make decisions."

Argonne National Laboratory seeks solutions to pressing national problems in science and technology. The nation's first national laboratory, Argonne conducts leading-edge basic and applied scientific research in virtually every scientific discipline. Argonne researchers work closely with researchers from hundreds of companies, universities, and federal, state and municipal agencies to help them solve their specific problems, advance America 's scientific leadership and prepare the nation for a better future. With employees from more than 60 nations, Argonne is managed by UChicago Argonne, LLC for the U.S. Department of Energy's Office of Science.

Eleanor Taylor | Newswise Science News
Further information:
http://www.anl.gov

More articles from Business and Finance:

nachricht How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung

nachricht Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Shape matters when light meets atom

Mapping the interaction of a single atom with a single photon may inform design of quantum devices

Have you ever wondered how you see the world? Vision is about photons of light, which are packets of energy, interacting with the atoms or molecules in what...

Im Focus: Novel silicon etching technique crafts 3-D gradient refractive index micro-optics

A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.

Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...

Im Focus: Quantum Particles Form Droplets

In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.

“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...

Im Focus: MADMAX: Max Planck Institute for Physics takes up axion research

The Max Planck Institute for Physics (MPP) is opening up a new research field. A workshop from November 21 - 22, 2016 will mark the start of activities for an innovative axion experiment. Axions are still only purely hypothetical particles. Their detection could solve two fundamental problems in particle physics: What dark matter consists of and why it has not yet been possible to directly observe a CP violation for the strong interaction.

The “MADMAX” project is the MPP’s commitment to axion research. Axions are so far only a theoretical prediction and are difficult to detect: on the one hand,...

Im Focus: Molecules change shape when wet

Broadband rotational spectroscopy unravels structural reshaping of isolated molecules in the gas phase to accommodate water

In two recent publications in the Journal of Chemical Physics and in the Journal of Physical Chemistry Letters, researchers around Melanie Schnell from the Max...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ICTM Conference 2017: Production technology for turbomachine manufacturing of the future

16.11.2016 | Event News

Innovation Day Laser Technology – Laser Additive Manufacturing

01.11.2016 | Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

 
Latest News

IHP presents the fastest silicon-based transistor in the world

05.12.2016 | Power and Electrical Engineering

InLight study: insights into chemical processes using light

05.12.2016 | Materials Sciences

High-precision magnetic field sensing

05.12.2016 | Power and Electrical Engineering

VideoLinks
B2B-VideoLinks
More VideoLinks >>>