About the Interview
In 2006, the Fed asked its macroeconometric model what would happen if house prices dropped by 20%. The model projected the past into the future and said: "Not much." Well, the financial crisis proved it wrong. Meanwhile, DSGE models, the main alternative up to this date, do not feature financial institutions; "They are not even good enough to be wrong," says Doyne Farmer. That's why Farmer and his team are developing an agent-based model, of the housing market first and of the entire economy next, to mimic the current financial crisis. The team collects data on actual people to calibrate a rich model with millions of interacting agents. This is a bottom-up approach to macroeconomics -- this is new economic thinking.
J. Doyne Farmer is a professor at the Santa Fe. His main interests are complex systems, with applications to financial markets and techological innovation. At Los Alamos National Laboratory he was an Oppenheimer Fellow and founded the Complex Systems Group in the Theoretical Division. He then founded the Prediction Company, which does fully automated quantitative trading for UBS. Full profile