This paper considers some of the difficulties in establishing verification and validation of agen... more This paper considers some of the difficulties in establishing verification and validation of agent based models. Simulation based results limit the ability to verify and blur the boundary between verification and validation. We suggest that a clear description of the phenomena to be explained by the model and testing for the simplest possible agent rules of behaviour are key to the successful validation of ABMs and will provide the strongest base for enabling model comparison and acceptance. In particular, the empirical evidence that in general agents act intuitively rather than rationally is now strong. This implies that models which assign high levels of cognition to their agents require particularly strong justification if they are to be considered valid. “Where do correct ideas come from? Do they drop from the skies? No. Are they innate in the mind? No. They come from social practice, and from it alone; they come from three kinds of social practice, the struggle for production, ...
Individuals are often influenced by the behavior of others, for instance because they wish to obt... more Individuals are often influenced by the behavior of others, for instance because they wish to obtain the benefits of coordinated actions or infer otherwise inaccessible information. In such situations this social influence decreases the ex ante predictability of the ensuing social dynamics. We claim that, interestingly, these same social forces can increase the extent to which the outcome of a social process can be predicted very early in the process. This paper explores this claim through a theoretical and empirical analysis of the experimental music market described and analyzed in [1]. We propose a very simple model for this music market, assess the predictability of market outcomes through formal analysis of the model, and use insights derived through this analysis to develop algorithms for predicting market share winners, and their ultimate market shares, in the very early stages of the market. The utility of these predictive algorithms is illustrated through analysis of the ex...
There is a large and rapidly increasing literature which analyses social networks for which subst... more There is a large and rapidly increasing literature which analyses social networks for which substantial amounts of quantitative data are available. Further, there is a growing and related literature on what is referred to by economists as ‘information cascades’ on such networks. However, there is little discussion of the specific events which lead to either the creation of a network in the first instance, or of how a network which is latent in terms of its awareness evolves into a network on which individual behaviour/beliefs are actually altered. In this paper, we describe the process of emergence and evolution of a historical cultural and social network across which the opinions and behaviour of individuals were influenced. We also illustrate how empirical networks can be reconstructed relying principally on information contained in qualitative, historical sources. The specific example we use is religious belief in England in the 1550s. We describe how the burnings of Protestant l...
The economic concept of rationality seems inappropriate in the context of creative innovation, be... more The economic concept of rationality seems inappropriate in the context of creative innovation, because of its assumption that the tastes and preferences of agents are fixed. The concept of copying, of imitating the behaviour of others, has equal claim to the description 'rational' in an innovative context. Models of ‘binary choices with externalities’ are predicated on copying and potentially show us not only why most innovations fail, but also why big social changes do not necessarily require big causes. In the ‘Long-tail’ world of a huge range of choice, however, many choices are not ‘binary, either-or’. In the long-tail world, popular choices tend to become more popular, but not forever, as innovation drives a constant turnover in the popularity rankings. A very simple model of ‘neutral’ copying with occasional originality of choice can explain real-world patterns of long-tail distributions under continual turnover.
Obtaining an accurate picture of the current state of the economy is particularly important to ce... more Obtaining an accurate picture of the current state of the economy is particularly important to central banks and finance ministries, and of epidemics to health ministries. There is increasing interest in the use of search engine data to provide such 'nowcasts' of social and economic indicators. However, people may search for a phrase because they independently want the information, or they may search simply because many others are searching for it. We consider the effect of the motivation for searching on the accuracy of forecasts made using search engine data of contemporaneous social and economic indicators. We illustrate the implications for forecasting accuracy using four episodes in which Google Flu Trends data gave accurate predictions of actual flu cases, and four in which the search data over-predicted considerably. Using a standard statistical methodology, the Bass diffusion model, we show that the independent search for information motive was much stronger in the cases of accurate prediction than in the inaccurate ones. Social influence, the fact that people may search for a phrase simply because many others are, was much stronger in the inaccurate compared to the accurate cases. Search engine data may therefore be an unreliable predictor of contemporaneous indicators when social influence on the decision to search is strong.
Even at the beginning of 2008, the economic recession of 2008/09 was not being predicted. The fai... more Even at the beginning of 2008, the economic recession of 2008/09 was not being predicted. The failure to predict recessions is a persistent theme in economic forecasting. The Survey of Professional Forecasters (SPF) provides data on predictions made for the growth of total output, GDP, in the United States for one, two, three and four quarters ahead since the end of the 1960s. Over a three quarters ahead horizon, the mean prediction made for GDP growth has never been negative over this period. The correlation between the mean SPF three quarters ahead forecast and the data is very low, and over the most recent 25 years is not significantly different from zero. Here, we show that the machine learning technique of random forests has the potential to give early warning of recessions. We use a small set of explanatory variables from financial markets which would have been available to a forecaster at the time of making the forecast. We train the algorithm over the 1970Q2-1990Q1 period, a...
Nyman and Ormerod (2017) show that the machine learning technique of random forests has the poten... more Nyman and Ormerod (2017) show that the machine learning technique of random forests has the potential to give early warning of recessions. Applying the approach to a small set of financial variables and replicating as far as possible a genuine ex ante forecasting situation, over the period since 1990 the accuracy of the four-step ahead predictions is distinctly superior to those actually made by the professional forecasters. Here we extend the analysis by examining the contributions made to the Great Recession of the late 2000s by each of the explanatory variables. We disaggregate private sector debt into its household and non-financial corporate components. We find that both household and non-financial corporate debt were key determinants of the Great Recession. We find a considerable degree of non-linearity in the explanatory models. In contrast, the public sector debt to GDP ratio appears to have made very little contribution. It did rise sharply during the Great Recession, but t...
The Economic Policy Uncertainty index had gained considerable traction with both academics and po... more The Economic Policy Uncertainty index had gained considerable traction with both academics and policy practitioners. Here, we analyse news feed data to construct a simple, general measure of uncertainty in the United States using a highly cited machine learning methodology. Over the period January 1996 through May 2020, we show that the series unequivocally Granger-causes the EPU and there is no Granger-causality in the reverse direction
We consider in this paper the evolution of a market in which a single product is produced, which ... more We consider in this paper the evolution of a market in which a single product is produced, which can be differentiated both on price and quality. The specific focus is upon the consequences of new entrants into a market in which, initially, there is a single monopoly supplier. We set up an agent-based model of firms and consumers, each following particular rules of behaviour for pricing and purchasing. The model extends beyond the comparative statics of conventional theory. In our model, the market evolves over time, and solutions to the model describe the market structure which evolves and emerges from the process of competition. The model contains a strong element of contingency, so each individual solution of the model is unique. On average, across a large number of solutions, the price falls (and the quality improves) from that set by the monopolist to a level very similar to that implied by the Cournot model, given the average number of firms which survive in the model. However...
Peer-to-Peer technology has produced disruptive outcomes in media distribution, knowledge creatio... more Peer-to-Peer technology has produced disruptive outcomes in media distribution, knowledge creation and even money lending. Also open source software powers much of the Web. What binds these advances together is a commitment to decentralisation and opening of the social structures that produce the quality outcomes we all benefit from. The question I want to ask is: Can we extend these trends to provide the functions of financial institutions? Put simply could we envisage a peer-to-peer open source bank or money system? Is this a viable and desirable project and what would we need to do to bring it about? The tragedy of the financial commons Recent events have shown that systemic failures in global financial systems can affect everyone even through this, arguably, results from the actions of a minority of participants. In this sense certain financial services, it could be argued, represent a kind of “financial commons” that can be run well for the benefit of all or poorly for all – al...
This paper offers an agent-based model of the US business cycle which is solved computationally. ... more This paper offers an agent-based model of the US business cycle which is solved computationally. The business cycle, along with long-term growth, is one of the two features which distinguishes capitalism from all previously existing societies. The source of cycles is posited in general in economic theory to be a series of random shocks which are external to the system. In this model, the cycle is an internal feature of the system, arising from the level of industrial concentration of the agents and the interactions between them in the face of uncertainty. The agents are myopic and follow behavioural rules which can be thought of as Keynesian rules of thumb. The model in contrast to most existing economic theories of the cycle accounts for the key time-series features of output growth in the US business cycle in the twentieth century. On average over a large number of simulations, the output growth series in the model is similar to that of the actual data both in terms of the autocor...
This paper considers some of the difficulties in establishing verification and validation of agen... more This paper considers some of the difficulties in establishing verification and validation of agent based models. Simulation based results limit the ability to verify and blur the boundary between verification and validation. We suggest that a clear description of the phenomena to be explained by the model and testing for the simplest possible agent rules of behaviour are key to the successful validation of ABMs and will provide the strongest base for enabling model comparison and acceptance. In particular, the empirical evidence that in general agents act intuitively rather than rationally is now strong. This implies that models which assign high levels of cognition to their agents require particularly strong justification if they are to be considered valid. “Where do correct ideas come from? Do they drop from the skies? No. Are they innate in the mind? No. They come from social practice, and from it alone; they come from three kinds of social practice, the struggle for production, ...
Individuals are often influenced by the behavior of others, for instance because they wish to obt... more Individuals are often influenced by the behavior of others, for instance because they wish to obtain the benefits of coordinated actions or infer otherwise inaccessible information. In such situations this social influence decreases the ex ante predictability of the ensuing social dynamics. We claim that, interestingly, these same social forces can increase the extent to which the outcome of a social process can be predicted very early in the process. This paper explores this claim through a theoretical and empirical analysis of the experimental music market described and analyzed in [1]. We propose a very simple model for this music market, assess the predictability of market outcomes through formal analysis of the model, and use insights derived through this analysis to develop algorithms for predicting market share winners, and their ultimate market shares, in the very early stages of the market. The utility of these predictive algorithms is illustrated through analysis of the ex...
There is a large and rapidly increasing literature which analyses social networks for which subst... more There is a large and rapidly increasing literature which analyses social networks for which substantial amounts of quantitative data are available. Further, there is a growing and related literature on what is referred to by economists as ‘information cascades’ on such networks. However, there is little discussion of the specific events which lead to either the creation of a network in the first instance, or of how a network which is latent in terms of its awareness evolves into a network on which individual behaviour/beliefs are actually altered. In this paper, we describe the process of emergence and evolution of a historical cultural and social network across which the opinions and behaviour of individuals were influenced. We also illustrate how empirical networks can be reconstructed relying principally on information contained in qualitative, historical sources. The specific example we use is religious belief in England in the 1550s. We describe how the burnings of Protestant l...
The economic concept of rationality seems inappropriate in the context of creative innovation, be... more The economic concept of rationality seems inappropriate in the context of creative innovation, because of its assumption that the tastes and preferences of agents are fixed. The concept of copying, of imitating the behaviour of others, has equal claim to the description 'rational' in an innovative context. Models of ‘binary choices with externalities’ are predicated on copying and potentially show us not only why most innovations fail, but also why big social changes do not necessarily require big causes. In the ‘Long-tail’ world of a huge range of choice, however, many choices are not ‘binary, either-or’. In the long-tail world, popular choices tend to become more popular, but not forever, as innovation drives a constant turnover in the popularity rankings. A very simple model of ‘neutral’ copying with occasional originality of choice can explain real-world patterns of long-tail distributions under continual turnover.
Obtaining an accurate picture of the current state of the economy is particularly important to ce... more Obtaining an accurate picture of the current state of the economy is particularly important to central banks and finance ministries, and of epidemics to health ministries. There is increasing interest in the use of search engine data to provide such 'nowcasts' of social and economic indicators. However, people may search for a phrase because they independently want the information, or they may search simply because many others are searching for it. We consider the effect of the motivation for searching on the accuracy of forecasts made using search engine data of contemporaneous social and economic indicators. We illustrate the implications for forecasting accuracy using four episodes in which Google Flu Trends data gave accurate predictions of actual flu cases, and four in which the search data over-predicted considerably. Using a standard statistical methodology, the Bass diffusion model, we show that the independent search for information motive was much stronger in the cases of accurate prediction than in the inaccurate ones. Social influence, the fact that people may search for a phrase simply because many others are, was much stronger in the inaccurate compared to the accurate cases. Search engine data may therefore be an unreliable predictor of contemporaneous indicators when social influence on the decision to search is strong.
Even at the beginning of 2008, the economic recession of 2008/09 was not being predicted. The fai... more Even at the beginning of 2008, the economic recession of 2008/09 was not being predicted. The failure to predict recessions is a persistent theme in economic forecasting. The Survey of Professional Forecasters (SPF) provides data on predictions made for the growth of total output, GDP, in the United States for one, two, three and four quarters ahead since the end of the 1960s. Over a three quarters ahead horizon, the mean prediction made for GDP growth has never been negative over this period. The correlation between the mean SPF three quarters ahead forecast and the data is very low, and over the most recent 25 years is not significantly different from zero. Here, we show that the machine learning technique of random forests has the potential to give early warning of recessions. We use a small set of explanatory variables from financial markets which would have been available to a forecaster at the time of making the forecast. We train the algorithm over the 1970Q2-1990Q1 period, a...
Nyman and Ormerod (2017) show that the machine learning technique of random forests has the poten... more Nyman and Ormerod (2017) show that the machine learning technique of random forests has the potential to give early warning of recessions. Applying the approach to a small set of financial variables and replicating as far as possible a genuine ex ante forecasting situation, over the period since 1990 the accuracy of the four-step ahead predictions is distinctly superior to those actually made by the professional forecasters. Here we extend the analysis by examining the contributions made to the Great Recession of the late 2000s by each of the explanatory variables. We disaggregate private sector debt into its household and non-financial corporate components. We find that both household and non-financial corporate debt were key determinants of the Great Recession. We find a considerable degree of non-linearity in the explanatory models. In contrast, the public sector debt to GDP ratio appears to have made very little contribution. It did rise sharply during the Great Recession, but t...
The Economic Policy Uncertainty index had gained considerable traction with both academics and po... more The Economic Policy Uncertainty index had gained considerable traction with both academics and policy practitioners. Here, we analyse news feed data to construct a simple, general measure of uncertainty in the United States using a highly cited machine learning methodology. Over the period January 1996 through May 2020, we show that the series unequivocally Granger-causes the EPU and there is no Granger-causality in the reverse direction
We consider in this paper the evolution of a market in which a single product is produced, which ... more We consider in this paper the evolution of a market in which a single product is produced, which can be differentiated both on price and quality. The specific focus is upon the consequences of new entrants into a market in which, initially, there is a single monopoly supplier. We set up an agent-based model of firms and consumers, each following particular rules of behaviour for pricing and purchasing. The model extends beyond the comparative statics of conventional theory. In our model, the market evolves over time, and solutions to the model describe the market structure which evolves and emerges from the process of competition. The model contains a strong element of contingency, so each individual solution of the model is unique. On average, across a large number of solutions, the price falls (and the quality improves) from that set by the monopolist to a level very similar to that implied by the Cournot model, given the average number of firms which survive in the model. However...
Peer-to-Peer technology has produced disruptive outcomes in media distribution, knowledge creatio... more Peer-to-Peer technology has produced disruptive outcomes in media distribution, knowledge creation and even money lending. Also open source software powers much of the Web. What binds these advances together is a commitment to decentralisation and opening of the social structures that produce the quality outcomes we all benefit from. The question I want to ask is: Can we extend these trends to provide the functions of financial institutions? Put simply could we envisage a peer-to-peer open source bank or money system? Is this a viable and desirable project and what would we need to do to bring it about? The tragedy of the financial commons Recent events have shown that systemic failures in global financial systems can affect everyone even through this, arguably, results from the actions of a minority of participants. In this sense certain financial services, it could be argued, represent a kind of “financial commons” that can be run well for the benefit of all or poorly for all – al...
This paper offers an agent-based model of the US business cycle which is solved computationally. ... more This paper offers an agent-based model of the US business cycle which is solved computationally. The business cycle, along with long-term growth, is one of the two features which distinguishes capitalism from all previously existing societies. The source of cycles is posited in general in economic theory to be a series of random shocks which are external to the system. In this model, the cycle is an internal feature of the system, arising from the level of industrial concentration of the agents and the interactions between them in the face of uncertainty. The agents are myopic and follow behavioural rules which can be thought of as Keynesian rules of thumb. The model in contrast to most existing economic theories of the cycle accounts for the key time-series features of output growth in the US business cycle in the twentieth century. On average over a large number of simulations, the output growth series in the model is similar to that of the actual data both in terms of the autocor...
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