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2:20 - 3:00 '''Doyne Farmer''' ([http://www.santafe.edu/~jdf/ homepage])
 
2:20 - 3:00 '''Doyne Farmer''' ([http://www.santafe.edu/~jdf/ homepage])
  
''Social evolutionWhere are the barnacles?''
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''Structure and strategy in financial marketsWhat can we understand without making detailed models of human behavior?''
  
Although evolution was originally conceived as a theory that should apply equally well to biology and society, the biological theory has prospered while the social theory has founderedIs this an indication that evolution is a useful concept for understanding biology but not for society, or is this just an accident of history? Alternatively, perhaps evolution is also valid for social systems, but is just an inherently harder problem? I will outline why I believe that the time is ripe to revisit the task of constructing a theory of social evolution, and present some requirements that need to be met for such a theory to be usefulFinally, I will propose finance as an area where the necessary "barnacles" are there, just waiting to be studied, and present some preliminary results.
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Over the last fifty years economics has increasingly become the study of strategic interactions in economic settings, with rational expectations as its principle toolThere are some successes with this approach, but there are also increasing reactions against it, leading to programs of research such as behavioral economics. While very much a supporter of behavioral economics, understanding how real people make decisions is a big problem that will probably take centuries to sort out.  How much we can understand using very simple models? I will argue that in many cases the culprit is not so much rationality itself, but rather the neglect of important structural propertiesBy structure I mean aspects of a problem such as the institutions that shape behavior or the emergent properties of humans interacting with each other and with these institutions.
  
Note that by social evolution I do not mean sociobiology, evolutionary psychology, or social Darwinism, which postulate (in diverse styles) interactions of biological evolution and human behaviorRather I mean the assertion that social constructs evolve under well-defined rules that are driven by descent with variation and selection, using the human substrate as a medium.  In my view there are unquestionably interesting interactions between biological and social evolution, but the dominant effect on society is social evolution itself.
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To illustrate this I will discuss one of the most classic problems in economics, supply and demand.  Because supply and demand are unobservable, a better target for research is the closely related concept of market impact (A.K.A price elasticity).  We will see that we can understand a great deal about the surprising functional form of market impact using models based on a mixture of different ideas, emphasizing structure or emphasizing strategy as needed.

Latest revision as of 15:02, 10 January 2008

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Is There a Physics of Society? January 10-12, 2008, Santa Fe NM

Organizers: Michelle Girvan (University of Maryland) and Aaron Clauset (Santa Fe Institute)

Saturday, January 12, 2008

2:20 - 3:00 Doyne Farmer (homepage)

Structure and strategy in financial markets: What can we understand without making detailed models of human behavior?

Over the last fifty years economics has increasingly become the study of strategic interactions in economic settings, with rational expectations as its principle tool. There are some successes with this approach, but there are also increasing reactions against it, leading to programs of research such as behavioral economics. While very much a supporter of behavioral economics, understanding how real people make decisions is a big problem that will probably take centuries to sort out. How much we can understand using very simple models? I will argue that in many cases the culprit is not so much rationality itself, but rather the neglect of important structural properties. By structure I mean aspects of a problem such as the institutions that shape behavior or the emergent properties of humans interacting with each other and with these institutions.

To illustrate this I will discuss one of the most classic problems in economics, supply and demand. Because supply and demand are unobservable, a better target for research is the closely related concept of market impact (A.K.A price elasticity). We will see that we can understand a great deal about the surprising functional form of market impact using models based on a mixture of different ideas, emphasizing structure or emphasizing strategy as needed.