Complex Adaptive Systems approach to Economic Development Ivan Garibay Director, Information Systems Group, ORC Joint Faculty, EECS Department Research Parkway Orlando FL, 32826

Global Economic Downturn Nobel Price on Economics, not big news Nobel Price on Economics, not big news Bubbles? dot-com bubble, stock market bubble, housing market bubble… Bubbles? dot-com bubble, stock market bubble, housing market bubble… Crashes? Financial Crisis? Crashes? Financial Crisis? There is no economic theory for this market “anomalies” There is no economic theory for this market “anomalies” Financial regulators do not have the tools they need to predict and prevent meltdowns 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) “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: Best current models: Econometrics: empirical statistical fitted to past data, forecast a quarter or two if nothing changes much, fails in great change 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 Dynamic Stochastic General Equilibrium Model: assumes a perfect world and by its very nature rule out crises

Agents-based modeling Alternative view to economics Alternative view to economics Build virtual markets in a computer Build virtual markets in a computer Populate it with artificially intelligent bits of software (agents) Populate it with artificially intelligent bits of software (agents) Agents interact with one another as people (or firms) do in real markets 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 Computer lets the overall behavior of the market emerge from the actions of the individual agents

Evolutionary Computing Free Market Economy = Evolutionary Process Free Market Economy = Evolutionary Process Competition and survival of the fittest adaptation ensure market resilience and stability Competition and survival of the fittest adaptation ensure market resilience and stability Innovation drives adaptation Innovation drives adaptation In my view: best argument in favor of free markets. 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” 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. 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 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 Firms ecosystems: differentiation and speciation to find niches to survive

Classical Economics Economical Man (homo economicus) Economical Man (homo economicus) Perfectly Rational Perfectly Rational Perfectly Informed Perfectly Informed Always takes the decision that maximizes its economical gain (profit) Always takes the decision that maximizes its economical gain (profit) No innovation or adaptation, static No innovation or adaptation, static Economic Systems Economic Systems At Equilibrium At Equilibrium Homogeneous agents (all economical mans are just copies of the same) Homogeneous agents (all economical mans are just copies of the same) Linear Dynamics (set of linear differential equations) Linear Dynamics (set of linear differential equations)

Complex Adaptive Systems Approach to Economics Complex Adaptive Systems Approach to Economics Economical Man (homo algorithmicus) Economical Man (homo algorithmicus) Bounded Rationality (by their local interactions and limited computational power) Bounded Rationality (by their local interactions and limited computational power) Only local interactions Only local interactions Decision is algorithmic: can adapt and learn Decision is algorithmic: can adapt and learn Economic Systems Economic Systems Far from equilibrium or not achieving equilibrium at all (no problem since there are no equations) Far from equilibrium or not achieving equilibrium at all (no problem since there are no equations) Heterogeneous (multiple agent types) Heterogeneous (multiple agent types) Non-linear Dynamics Non-linear Dynamics

CAS Economic Models Santa Fe Artificial Stock Market Model (1994, Palmer, Arthur, Holland, LeBaron, Tyler) Santa Fe Artificial Stock Market Model (1994, Palmer, Arthur, Holland, LeBaron, Tyler) Sugar Space Model (1996, Epstein & Axtell) Sugar Space Model (1996, Epstein & Axtell) Not considered a orthodox approach to economics then, 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 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 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.) 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 Impact of business incubation programs

UCF CAS Economics Team Thomas O’Neal, Thomas O’Neal, Associate Professor, Management Department Associate Professor, Management Department UCF Vice President of Research and Commercialization UCF Vice President of Research and Commercialization Director UCF Technology Incubator Director UCF Technology Incubator Executive Director, Florida Economic Gardening Institute Executive Director, Florida Economic Gardening Institute Cameron Ford, Cameron Ford, Associate Professor, Management Department Associate Professor, Management Department Director, Center for Entrepreneurship and Innovation Director, Center for Entrepreneurship and Innovation Ivan Garibay, Ivan Garibay, Joint Faculty, EECS Department Joint Faculty, EECS Department Director, Complex Adaptive Systems Laboratory Director, Complex Adaptive Systems Laboratory Director, Information Systems, ORC, UCF Director, Information Systems, ORC, UCF Vernet Lasrado, Graduate Student, Industrial Engineering Vernet Lasrado, Graduate Student, Industrial Engineering Chris Hollander, Graduate Student, EECS Chris Hollander, Graduate Student, EECS

UCF Economic Development Framework Agent Based Agent Based Fix Agents: environmental firms (universities, regional banks, supporting firms, state agencies, etc.) 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. Free Agents: high-tech firms, move looking for an appropriate environment, transformative, knowledge based. Darwinian Evolution Darwinian Evolution Model firm competition with other firm and firm constant adaptation to their environment Model firm competition with other firm and firm constant adaptation to their environment

UCF CAS Economic Development Framework (software) Based on MASON: Based on MASON: Multi Agent Simulation Library in Java Multi Agent Simulation Library in Java Developed George Mason University: Evolutionary Computation Laboratory & Center for Social Complexity Developed George Mason University: Evolutionary Computation Laboratory & Center for Social Complexity Currently a work in progress Currently a work in progress Basic UCF Economic Development Framework to be completed this semester Basic UCF Economic Development Framework to be completed this semester Next semester (EEL4818 Spring) experimentation and validation Next semester (EEL4818 Spring) experimentation and validation

EEL4818 projects UCF CAS ED model’s code will be made available UCF CAS ED model’s code will be made available 3 projects to choose from (in order of difficulty) 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 !