Can We Predict The Unpredictable? with J. Doyne Farmer
Big Brains
Deep Dive
What is complexity economics and how does it differ from traditional economics?
Complexity economics uses advanced computers and simulations to model the economy with millions of agents, each making decisions based on real-world constraints. Unlike traditional economics, which assumes rational agents and equilibrium, complexity economics incorporates bounded rationality and the messiness of real-world decision-making.
Why did J. Doyne Farmer start studying complex systems?
Farmer began studying complex systems as a physicist, initially focusing on predicting the seemingly random motion of a roulette ball. This project, which involved building wearable computers to predict outcomes, planted the seed for his later work in complexity economics.
How did Farmer's Prediction Company perform in the stock market?
Prediction Company, which used complex systems models to trade, had a return-to-risk ratio six times better than standard market bets. The company made significant profits for UBS and lasted 28 years, with profits in 27 of those years.
What is agent-based modeling in complexity economics?
Agent-based modeling involves creating simulations where individual agents (e.g., households, businesses) make decisions based on heuristics and real-world constraints. These models capture the heterogeneity and interactivity of real-world agents better than traditional economic models.
What are some real-world applications of complexity economics?
Complexity economics has been used to model housing markets, predict the economic impact of the COVID-19 pandemic, and guide national banks in decision-making. For example, an agent-based model of housing markets is now used by several central banks.
What is Farmer's vision for the future of complexity economics?
Farmer envisions complexity economics becoming as influential as Google Maps in guiding economic decision-making. He aims to create tools that businesses and governments can use to predict outcomes and make more informed, sustainable decisions.
How does complexity economics address inequality and economic stability?
Complexity economics models show that inequality can naturally arise in a laissez-faire economy due to random luck. The field aims to guide policies that reduce inequality and smooth out business cycles, potentially leading to smaller recessions and more stable economies.
What role does technology play in complexity economics?
Technological innovation drives economic growth, and complexity economics helps predict the rate of improvement in technologies like solar panels and electronic circuits. It also models how industries, such as energy, evolve over time based on investment and policy changes.
What does Farmer predict for the energy transition due to climate change?
Farmer predicts the energy transition will happen faster than expected, driven by exponential improvements in solar, wind, and storage technologies. He believes the transition will be mostly complete within 20 years, with solar and wind dominating and fossil fuels becoming less competitive.
Why is Farmer optimistic about the adoption of complexity economics?
Farmer believes complexity economics will gain widespread adoption as success stories emerge and models prove their effectiveness. He compares its potential impact to previous scientific revolutions like chaos theory, which went from being unconventional to widely accepted.
- The possibility of using data to predict the future, even chaotic events like human actions is explored.
- The application of this idea to economics is discussed, specifically in relation to forecasting the stock market and the potential impact on policymaking.
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