1. Economics: Rethink or Sink
Edward Tsang
Acknowledgement:
Much of the idea here came from Richard Olsen

2. Classical Economics To model economy and prices mathematically
Start with assumptions
Results follow
Robust…
… as long as the assumptions hold…

3. “If I were the queen of France, I shall give you 1 million Euro”
“If you give me a fish, I shall sing you a song”

4. A Shaky Castle Classical economics built on critical assumptions
Everybody is perfectly rational
Homogeneity
Computation is ignored
Market has changed!

5. How RATIONAL are we?

6. Which Option Will You Take?

7. Which Option Will You Take?
£100 now
£10 per month for 12 months …

8. What Is Your Move? What is the optimal move? Rules are clearly defined
No hidden information
Shouldn’t a rational player pick the optimal move?
Problem: too much to compute!

9. Computational Finance and Economics, Tutorial
27/04/2018
What is Rationality?
Some decisions require computation
Some computation methods are better than others
Does it mean that some are more rational than others?
If so, the statement “investors are rational” is ambiguous
Edward Tsang, All Rights Reserved

10. Dubious Assumptions “Investors are rational”?
“Investors are homogeneous”
Computation matters but ignored
… but are they close enough?

11. Computational Finance and Economics, Tutorial
27/04/2018
Changes In The Market
Stock Exchange
New
Instruments
e.g. Options,
CFDs
Edward Tsang, All Rights Reserved

12. The Amazon Butterfly Effect
Movements amplified
By increased leverage
By algorithmic trading
Chain reactions
One reaction causes more reactions

13. Markets have changed Now what?
Can we study market as a hard science?

14. The “Biology” of Markets (Richard Olsen)
How was biology studied?
Observe
Copy
Measure
Generalize …

15. How Long is a Coastline?

16. Market Physics We don’t know where people might add weights
How much weight can we put on various positions?
We don’t know where people might add weights
But we can study the consequences of possible actions!

17. A Wiki-style repository of software for studying finance
Data
(FX rates, stock prices, interest rates, etc)
modules implementing models and operations
Users upload / retrieve modules
Interaction between modules
Web-based
Open-source
Possibly through machine learning
Computer Scientist
Exchanges
Economist

18. Concluding Summary Classical economics build castles on sand
Due to unrealistic assumptions
The ground has moved
The castle is sinking
New approaches needed:
Remove unrealistic assumptions
Treat market as hard science
Infrastructure required

19. “The Economic Crisis is a Crisis for Economic Theory”
Alan Kirman
CESifo Economic Studies, Vol.56, Issue 4, 2010, pp

20. Want more? This video: http://youtu.be/zIkHjo1ubpg
More info:
Edward Tsang: