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

CNT- selectingandsupportingactionunder(radical)uncertainty

ReproducedfromTuckettandNikolic,2017

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)

RSS(AnimalSpirits)andtheCanadianEconomy

RSS(AnimalSpirits)andtheUKEconomy

RSS(AnimalSpirits)andtheUSEconomy

CrosssectionalComparisons:RSS&EightEconomies

Grangercausality

VectorAutoRegression(VAR)

TheimpulseresponseofRSSonIPandEmployment,fortheUS,UK,andCanada

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.

Grangercausalitybetween(US)RSSandothercommonmeasuresofsentiment

ConclusionØMacroeconomicmodelscouldadvantageouslydroptheassumptionthateconomicactorsareabletoknowwhatisgoingonintheeconomy.ØItremovesradicaluncertaintyandotheraspectsofreality.

ØDropthedistinctionbetweenrationalandirrational(orbehavioural)Øàincorporateatheoryofrationalactionwhichtakesaccountofwhatweknowaboutthewayhumansentientandsocialactorstakedecisionsunderradicaluncertainty.

ØAlotofhighlytargetedethnographicresearchshouldbevaluable.

ØCNT,ahigh-leveltheoryofdescribinghowagentsusenarrativeandemotionindecision-makingunderradicaluncertainty,maybeuseful.

ØApplicationsofCNTusingalgorithmicanalysisnarrativesinnewsandnarrativesshowsomepromise.