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TheFutureofMacroeconomicsWhyobservationofthebehaviourofhumanactorsandhowtheycombinewithinthe
economy,isanimportantnextstep
DavidTuckettUCLCentrefortheStudyofDecision-MakingUncertainty
Edinburgh.INETConference,October23rd,2017
IntroductionqFuturemacroeconomicsmightre-establishacrediblereputationinthreeways:qIncorporatingsecureadvancesmadeinotherareasofeconomicthinking
qE.g. informationeconomicsorgametheory,etc
qUsingnewmethodsofanalysisanddatahandling.qFromphysicsandcomputerscience,suchasagentbasedmodellingandmachinelearning.
qFacingafundamentalissueattheheartofeconomicthinking.qHumaneconomicagentssimplycannotknowtheeconomicfactsoftheworldorco-ordinateonthemexceptthroughtheirhumaninterpretiveandperceptivecapacities,necessarilybasedonbrainarchitectureandpsychologylocatedinspecificsocialenvironments.
Inmodernsocialandbrainsciencefactsarenotavailableforactionexceptviaembodiedandsociallyinfluencedperceptionandmemory…
Startbystudyingtheconditionsconstrainingdecision-makers…
SocialInteraction,FallibilityandReflexivityarethenorm:Noneofthedescriptionsofdecision-makinginthesestudiesareconsistentwithstandardmodels.Norarethosefromothersimilarwork.
EcologicalValidityandBoundedRationality
• “thetaskistoreplacetheglobalrationalityofeconomicmanwithakindofrationalbehavior thatiscompatiblewiththeaccesstoinformationandthecomputationalcapacitiesthatareactuallypossessedbyorganisms,includingman,inthekindsofenvironmentsinwhichsuchorganismsexist.”(italicsadded).Simon,1946• Theassumptionofglobalrationalityandtheassumptionofriskratherthanuncertaintyhasavoidedtheproperstudyofhoweconomicactorsco-ordinate.Thefutureneedstoaddressthem.
ConvictionNarrativeTheory(CNT)• Actors‘supplement’andsupportreasonablecalculationwith‘animalspirits’,andsoputasidethoughts‘ofultimateloss…asahealthymanputsasidetheexpectationofdeath’..[if]theanimalspiritsaredimmedandthespontaneousoptimismfalters,leavingustodependonnothingbutamathematicalexpectation,enterprisewillfadeanddie;—thoughfearsoflossmayhaveabasisnomorereasonablethanhopesofprofithadbefore.(Keynes1936,p162)• CNTisanewsocial-psychologicaltheoryofdecision-makingwhichaskshoweconomicactorsmanagetoactinradicaluncertaintyandwithwhatconsequencesforthewaytheyco-ordinatewhentheirdecisionsareaggregated.• Agentsadoptconvictionnarratives(narrativestheythinkaccurateandfeelaretrue)thataresubjectivelycapableofsupportingactionbecausetheycognitivelyandaffectivelymanageboththeanticipationsofpotentialgainandlossassociatedwithitsuncertainconsequences.• Convictionnarrativesarerapidlyresponsivetochangesinnarrativesentiment.
Cognitive(Deliberative)Processes
EmotionalProcesses(feelsgoodorbad)
ActionConvictionNarrative
Cognitionandemotioncombinetofacilitateaction….Model
DividedStateTheoryqInCNT,alldecisionsmadeunderuncertaintynecessarilyrequire(exante)convictionnarratives.qConvictionisachievedbyimaginingpossiblenarrativeoutcomeswhichevokeapproachandavoidance.
qUnderuncertaintywecanexpectfromanoutsideviewthatmostnarrativeswouldcontainsomegroundsforfeelingapproachandsomeforavoidanceà inside anxietyrepellingtechniquescanbeusedtodiminishavoidance.OrinsideexcitementamplifyingtechniquescancreateanattachmenttoaidealisedPhantasticobject.
q “Dividedstate”(DS)– isasituationinwhichcertaintopicsorsituationsexhibitanunusuallackofbalance– eitheravoidance(anxiety)orapproachexcitementseeminternally todiminishordisappear.(Switch)qWethinkwhatwecantoleratetofeel,thingsnottoleratedarenotseen.
UpdatinginDS and IS States
• NewCongruentFeeling
InformationElements
NewIncongruentFeeling
InformationElements
Approachversus
AvoidanceAppraisalofNewDataElements
PriorNarrativePrediction
UpdatedNarrativePrediction
NewCongruentFeeling
InformationElements
NewIncongruent
FeelingInformationElements
TopicSentiment:LiquidityArticlesinUSReuters
Approach
Avoidance
RSS=NumberofApproachWordsLessAvoidancewords(normed)
TopicConsensus
Dispersed
Consensus
Approach
Avoidance
Reflectsnewscontent– doesnotexplicitlymodelopposingviewsorcapturemarketconsensus,butmarketconsensusmayreflectwhatpeopleread:
– “Thehistoryofspeculativebubblesbeginsroughlywiththeadventofnewspapers.[…]Althoughthenewsmedia…presentthemselvesasdetachedobserversofmarketevents,theyarethemselvesanintegralpartoftheseevents.Significantmarketeventsgenerallyoccuronlyifthereissimilarthinkingamonglargegroupsofpeople,andthenewsmediaareessentialvehiclesforthespreadofideas.”(Shiller,2000)
UKVAR(Impactofanegativeshock)
WealsofollowBakeretal(2016)inconsideringshockstoRSSequivalenttothedifferencebetweenthemeanvaluein2005-2006andthemeanvaluein2011-2012– periodseithersideofthecrisisdominatedbyrelativelystableandhighlevelsofRSSandbyvolatileandlowlevelsofRSSrespectively.Thedifferencebetweenthetwoperiodsrepresents2.5standarddeviationsofRSS.
The maximum increase in the FTSE resulting from a 2.5 standard deviation shock in RSS is 7.28%. For employment and industrial production the corresponding figures are 1.24% and 0.25% respectively.
ConclusionØMacroeconomicmodelscouldadvantageouslydroptheassumptionthateconomicactorsareabletoknowwhatisgoingonintheeconomy.ØItremovesradicaluncertaintyandotheraspectsofreality.
ØDropthedistinctionbetweenrationalandirrational(orbehavioural)Øàincorporateatheoryofrationalactionwhichtakesaccountofwhatweknowaboutthewayhumansentientandsocialactorstakedecisionsunderradicaluncertainty.
ØAlotofhighlytargetedethnographicresearchshouldbevaluable.
ØCNT,ahigh-leveltheoryofdescribinghowagentsusenarrativeandemotionindecision-makingunderradicaluncertainty,maybeuseful.
ØApplicationsofCNTusingalgorithmicanalysisnarrativesinnewsandnarrativesshowsomepromise.