21 st century economics paul ormerod
TRANSCRIPT
Overview
• The core model of economics remains the rational agent operating autonomously with fixed preferences, gathering information and making choices based on the attributes of the alternatives
• This is also the intellectual foundation of a great deal of social and economic policy
• How much of it is still relevant to the 21st century?• The core model will be one in which the attributes are of
much less consequence in making choices
Theoretical considerations: the background
• Consumers now face a stupendous proliferation of choice – over 10 billion – billion! – choices are available in New York City alone
• Many of these products are complex, hard to evaluate• We are far more aware than ever before of the
behaviour/opinions/choices of others• In 1900, most of the world’s population lived in villages. Now, over half
live in cities• The internet is transforming the world like the printing press did in the 15th
century• The preferences of agents are not fixed, they evolve in many ways.
Specifically, they can be altered directly by the behaviour of other agents
Keynes QJE 1937
• ‘We have, as a rule, only the vaguest idea of any but the most direct consequences of our acts’
• ‘How do we manage in such circumstances to behave in a manner which saves our faces as rational economic men?’1. ‘we assume the present is a much more serviceable guide to the future than a candid examination of past experience would show it to have been hitherto’2. ‘we assume that the existing state of opinion is based on a correct summing up of future prospects, so we can accept it as such unless something new and relevant comes into the picture’3. ‘We endeavour to fall back on the judgement of the rest of the world... The psychology of a society of individuals each of whom is endeavouring to copy the others leads to what may be called a conventional judgement
How big is the fiscal multiplier?
• No consensus despite decades of econometric research• Laury, Lewis, Ormerod (1978) for the UK range is 0.5 to 1.2• Ramey (J Ec Lit 2011) range for the US is 0.8 to 1.5• True range may be much wider (e.g. Barro and Redlick QJE
2011)• Because of sentiment - copying
Considered Choice
Copying Experts
Guesswork
Copying Peers
A heuristic classifier of ‘rationality’
Adapted from Bentley, O’Brien Ormerod (2011) Mind and Society
Independent
Attributes hard to distinguish
Copying
Attributes easy to distinguish
Tastes and preferences are not fixed in many contexts• Thomas Schelling (2005): ‘binary choice with externalities’
• Agents either buy a brand or they don’t
• Agents are optimistic or pessimistic
• Agents are solvent/not solvent
• Your decision might change directly the decisions of those who might be influenced by you, and vice versa : ‘externalities’
Binary choice with externality
• Much of the agent based/network literature which focuses on the spread of ideas/behaviour, essentially involves ‘binary choice with externalities’ (Schelling 1973, Watts 2002)
• Heterogeneous agents are connected on a network and can be in one of two states of the world
• Agents switch depending upon their individual threshold (propensity to switch) and the states of the world of their neighbours
• With this model, the process of ‘adoption’ of new norms or shared conceptions is essentially one of copying (imitation)
• A much more general version; Bentley, Ormerod, Batty, ‘Evolving social influence in large populations’, Behavioral Ecology and Sociobiology, 2011S
0.0 0.2 0.4 0.6 0.8
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4060
8010
012
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Distribution of size of cascade: identical initial shock1000 solutions, small world network
proportion switching to state 1
freq
uenc
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The music download experiment: an example of copying
• Salganik, Dodds, Watts, ‘Experimental study of inequality and unpredictability in an artificial cultural market’, Science, 2006
• Students downloaded previously unknown songs either with or without knowledge of previous participants' choices
• This information was both ranked and unranked• Students also gave the songs a rating
05
01
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15
0Number of downloads of each of the 48 songs
No social influence
Do
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Number of downloads of each of the 48 songsStrong social influence
Do
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Final market share in SI world and average rating non-SI world
Average rating in non-SI world
Fin
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ark
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in S
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2.8 3.0 3.2 3.4
51
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5
Social and economic outcomes are typically non-Gaussian
- downloads on YouTube - film producers’ earnings
- the number of sexual partners people have- the size of price changes in financial assets- crowds at soccer matches- firm sizes- the size and length of economic recessions- unemployment rates by county in America and the UK- deaths in wars - the number of churches per county in William the Conqueror’s Domesday Book survey of England in the late 11th century
Two key empirical features
• Non-Gaussian distribution at a point in time• Turnover in rankings within the distribution over time• The core model of behaviour must have these characteristics• As with the core rational agent model of economics, we can
modify it as appropriate to the context• Economists need to be taught network theory!• Paul Ormerod Positive Linking, Faber and Faber