Economic Models Ignore Dependency and Irrationality - Is Agent Based Computing the Answer?

Summary

There is a nice article in the New Scientist Magazine (30th October 2010) by Philip Ball that looks at economic modelling.

It starts out by looking at the popular cause of the current economic crisis, the bankers and the American sub-prime mortgage market but points out the error in simply blaming the bankers , the opaque financial mechanisms and inducements to sell:

it ignores the complexities of a system that led the initially small perturbation of the "sub-prime" mortgage crisis to morph into systemic collapse. Moreover, concentrating on the specific causes of that one event fixates on the past at the expense of the future. When the next crisis comes, the disturbance will probably ripple out from another quarter of the economy, taking us completely unawares

It then asks if there is a better way in which we could prepare ourselves

Instead of making unrealistically simplistic assumptions about human behaviour and the properties of markets, we can harness the number-crunching power of modern computing, coupled with our emerging understanding of the physics of complex systems, to rebuild economic theory from the bottom up. Extending that approach to the social sciences more generally could help us develop forecasting tools to assess a whole range of problems threatening human society

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