Michael Battalio


Monday, March 07, 2016

Discussions on Wealth (part 13): Chapter 6: summary part 2 and discussion

This discussion on wealth is an offshoot of  Serious Conversations parts 53 and 54.  We are considering the book  The Origin of Wealth by Eric D. Beinhocker.  (I do not profit from clicks).  (Ed.:  we will be taking the general format of outlining the major points of the chapter and then discussing what we believe to be important or intriguing points.)

Last time we covered the new theory of bounded rationality which says while humans are smart, we aren’t that smart.  This is unlike traditional economics where humans a (laughably) perfectly rational.  Most importantly we have the process of inductive reasoning described.  The example of a frog is used to demonstrate how agents would use rules and inputs to determine behavior.  For example, IF [small] , [flying] THEN [extend tongue].  

We conclude the Ch 6 discussion by considering how this inductive model could be applied to describe the stock market.  A new model like Sugar-scape but applying the frog model is used to model the stock market.  The important change is that the stock market agents can learn.  A market with one stock and a random dividend was created; the sole goal of 100 agents was to make money.  The 100 agents each had 100 rules of varying complexity that determined when they would buy and sell.  Like the frog example, the agents decide on which rule by what has worked in the past.  The process of learning was introduced by randomly removing poorly performing rules and making new ones by randomly concatenating old rules that worked.  A test case with one rule that was of perfect rationality showed that there was little volatility and everyone made pretty much the same amount of money.  This is the situation predicted by Traditional economics.  The second run utilized the full strategy above.  Trading volume and volatility went up.  The stock price varied dramatically.  Some agents did very well, others went bankrupt.  It essentially duplicated the real world.  

Discussion:

I’d like to use the ultimatum game to talk about income inequality.  It really is shocking to me that the income inequality gap isn’t a bigger deal in society today.  So few have so much, while the rest of us have so little.  I would think that we would be okay with the economy slowing some so that the super rich don’t keep gaining on us.  I know I would be, even it was to our short term detriment.  I’m also so surprised that the poor in the deep south are some of the most ingrained into the conservative economic model or trickle down economics, which clearly doesn’t work.  Many of them are against raising the minimum wage when most would benefit.  It is amazing that the GOP has convinced these people to vote against their economic interest just because they share social interests. 

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