Saturday, 29 October 2011

Nobel Prize, rational agents and parallel universes

Your are probably asking yourself now “what is the connection between all these supernatural things and economics?”. You are about to get your answer.

Are you aware of who got the Nobel Prize in Economics this year? Christopher Sims and Thomas Sargent did (for their “empirical research on cause and effect in the macroeconomy”)!
Christopher Sims is known (amongst his other numerous achievements) for designing a theoretical framework called "rational inattention". The framework provides a general approach to modelling decision-making of economic agents with limited abilities to obtain and process information. The concept of the rational inattention assumes that all pieces of information are freely available, but agents process only the most important of them by using channels of limited information capacity. Agents simply do not pay full attention even to information that is easily attainable with a negligible cost (especially today, in the era of Internet, Wi-Fi and smart phones)

Do you happen to watch the TV series called “Fringe”? If you do, recall the 3rd season’s episode called “The Plateau”. In this particular episode, the FBI team on Earth-2 (the Earth in our parallel universe) is after a man who has been made immensely clever thanks to the medical experiment. The man has a brain like a supercomputer and can obtain and process all available information from his surrounding (and can make the bus driver to hit the doctor who wants to put him back into the mental institution). The story was actually based in Daniel Keyese’s book “The flowers for Algernon” written in 1959 (which is a very beautiful and very sad book but we strongly recommend you to read it!). The man (named Milo) is so “rationally attentive” that would predict any event and could even start a chain of events. He is caught by the agent Olivia Dunham eventually because he assumes she would obey the warning signs at the construction zone (although she did not because she was from our universe (Earth-1) and did not know the meaning of the sign).

How would our economy behave if the world was full of “Milos”? How would the markets react, how would the prices be formed? An interesting question, isn't it? And worth giving a Nobel Prize for, too!
We are investigating this matter now and working on a paper that would explain these issues. Hopefully we will be ready to present our results soon. Watch out for the link and learn more about this problématique. Follow our blog and stay tuned in!

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