Complex Adaptive Systems approach to

Economic Development

Ivan GaribayDirector, Information Systems Group, ORC

Joint Faculty, EECS Department12201 Research Parkway

Orlando FL, 32826

Global Economic Downturn

Nobel Price on Economics, not big news

Bubbles? dot-com bubble, stock market bubble, housing market bubble…

Crashes? Financial Crisis?

There is no economic theory for this market “anomalies”

Financial regulators do not have the tools they need to predict and prevent meltdowns

“flying by the seat of their pants”

“The leaders of the world are flying the economy by the seat of their pants” (J.D. Farmer, Nature, vol. 460, pp. 685, 2009)

Best current models: Econometrics: empirical statistical fitted to

past data, forecast a quarter or two if nothing changes much, fails in great change

Dynamic Stochastic General Equilibrium Model: assumes a perfect world and by its very nature rule out crises

Agents-based modeling

Alternative view to economics

Build virtual markets in a computer

Populate it with artificially intelligent bits of software (agents)

Agents interact with one another as people (or firms) do in real markets

Computer lets the overall behavior of the market emerge from the actions of the individual agents

Evolutionary Computing

Free Market Economy = Evolutionary Process

Competition and survival of the fittest adaptation ensure market resilience and stability

Innovation drives adaptation

In my view: best argument in favor of free markets.

Evolutionary model of firms innovation and adaptation

Firms competitiveness and adaptation in a free market economy parallels organisms competitiveness and adaptation in a natural environment: “survival of the fittest”

Unfit firms die off, better adapted firms reproduce: copy cats: Coke-Pepsi-RC Cola, etc.

Co-evolution of firms: firms fitness is determined by their environment and all other firms

Firms ecosystems: differentiation and speciation to find niches to survive

Classical Economics

Economical Man (homo economicus) Perfectly Rational Perfectly Informed Always takes the decision that maximizes its

economical gain (profit) No innovation or adaptation, static

Economic Systems At Equilibrium Homogeneous agents (all economical mans are just

copies of the same) Linear Dynamics (set of linear differential equations)

Complex Adaptive Systems Approach to Economics

Economical Man (homo algorithmicus) Bounded Rationality (by their local interactions

and limited computational power) Only local interactions Decision is algorithmic: can adapt and learn

Economic Systems Far from equilibrium or not achieving equilibrium

at all (no problem since there are no equations) Heterogeneous (multiple agent types) Non-linear Dynamics

CAS Economic Models

Santa Fe Artificial Stock Market Model (1994, Palmer, Arthur, Holland, LeBaron, Tyler)

Sugar Space Model (1996, Epstein & Axtell)

Not considered a orthodox approach to economics then,

Currently, gaining ground rapidly in economic and management circles as a highly innovative method of economic analysis

UCF CAS Economics Group

Seek to understand economic development

Increase the effectiveness and impact of UCF as an agent of regional economic growth (jobs, number of high-tech firms, etc.)

Impact of business incubation programs

UCF CAS Economics Team

Thomas O’Neal, Associate Professor, Management Department UCF Vice President of Research and Commercialization Director UCF Technology Incubator Executive Director, Florida Economic Gardening Institute

Cameron Ford, Associate Professor, Management Department Director, Center for Entrepreneurship and Innovation

Ivan Garibay, Joint Faculty, EECS Department Director, Complex Adaptive Systems Laboratory Director, Information Systems, ORC, UCF

Vernet Lasrado, Graduate Student, Industrial Engineering

Chris Hollander, Graduate Student, EECS

UCF Economic Development Framework

Agent Based Fix Agents: environmental firms (universities,

regional banks, supporting firms, state agencies, etc.)

Free Agents: high-tech firms, move looking for an appropriate environment, transformative, knowledge based.

Darwinian Evolution Model firm competition with other firm and

firm constant adaptation to their environment

UCF CAS Economic Development Framework (software)

Based on MASON: Multi Agent Simulation Library in Java Developed George Mason University:

Evolutionary Computation Laboratory & Center for Social Complexity

Currently a work in progress Basic UCF Economic Development Framework

to be completed this semester Next semester (EEL4818 Spring)

experimentation and validation

EEL4818 projects

UCF CAS ED model’s code will be made available

3 projects to choose from (in order of difficulty)A. Test and Evaluate the UCF CAS ED model by

reproducing expected macroeconomic behavior

B. Implement and compare various learning techniques for the agents in the model, evaluate their effect on the model

C. Propose learning techniques to help fit the model to real data

Thanks !