Richard Bookstaber, The End of Theory
William H. Janeway
311

I read Bookstaber’s earlier book A Demon of our Own Design, but I have not read this book.

Agent Based economic models go back something like two decades. The Santa Fe Institute has been a center for agent based modeling and Doyne Farmer of the Santa Fe Institute (and co-founder of The Prediction Company) has written extensively in this area.

Agent based models, with agents that have various characteristics and interact in synthetic markets, have produced markets that have characteristics of real world markets. This may be great for academic economic theory, but it is of less use in the real world.

The real world is very complicated and the interactions are difficult to simplify so that they can be expressed as agents. Even if it were possible to build agents that incorporated the important features of market participants, the model builder would need the insight to understand what those feature were. In the case of the 2008 financial crisis few people understood the features of the market and where they were leading.

Outside of the world of academic economics, the purpose of models is to understand the present and predict possible futures. To do this, it must be possible to initialize a model with observed information. The model would then be run to model the current market and possible future markets.

For an agent based model to be useful for a practitioner who is ether trying to share real world economic policy or who is investing/speculating in the market the model must not only act like the real world but be able to model the real world from a defined starting point.

I have not read the agent based modeling literature recently. A quick Google search shows that there is some work that attempts to apply agent based modeling to real prediction. My impression is that none of this work is successful enough that the Federal Reserve or a hedge fund would use the result.

One of the reasons that I have not spent my hard earned money on Bookstaber’s latest book is the impression that as a retired practitioner he is proposing an academic solution to real world problems.

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