A project led by SFI Professor Doyne Farmer and External Professors Rob Axtell and John Geanokoplos to create agent-based models of the U.S. economy is one of 27 initial projects to receive $6.5 million in grants from the Institute for New Economic Thinking.

INET seeks to promote changes in economic theory and practice through conferences, grants, and education initiatives. Some 50 grantees from 11 different countries are involved in the funded projects, selected out of about 500 proposals submitted over the summer.

More than three years after the global financial crisis, economists are still grappling with why their forecasting models failed to alert them. A few are beginning to ask whether new kinds of models are needed.

Traditional top-down econometric models use past data to forecast future trends, so they fall short when facing an unprecedented crisis. General equilibrium models, the other kind of traditional model, assume that economies and markets fluctuate around and return to a perfect, stable, crisis-free equilibrium.

Farmer, Axtell, and Geanakoplos want to build a new kind of model, called an agent-based model, of the U.S. economy.

Unlike traditional models, agent-based models don’t make assumptions about how the whole economy behaves, instead building behaviors from the bottom up, assigning particular behavioral rules to each decision-making agent in the economy. This enables the emergence of more complex, life-like market behaviors, such as the copycat behavior that leads to “herding” among investors, or investors learning from experience and switching their strategies.

Farmer spoke at the April 2010 inaugural meeting of the Institute for New Economic Thinking about the need for new kinds of models that depict truly rational behavior: that of agents making decisions based on incomplete information in complex, changing environments.

INET was founded in October 2009 with a $50 million pledge by George Soros.  Read INET's announcement of the awards.

See also: Article in the Wall Street Journal blog "Real-Time Economics" (October 18, 2010)

See also: Newsweek article, "Our Best Minds Are Failing Us" (September 16, 2010)

See also: SFI news article, "Rethinking Economics" (July 23, 2010)