This paper proposes a novel method to compute the simulation part of the Krusell-Smith (1997, 1998) algorithm when the agents can trade in more than one asset (for example, capital and bonds). The Krusell-Smith algorithm is used to solve general equilibrium models with both aggregate and uninsurable idiosyncratic risk and can be used to solve bounded rationality equilibria and to approximate rational expectations equilibria. When applied to solve a model with more than one financial asset, in the simulation, the standard algorithm has to impose equilibria for each additional asset (find the market-clearing price), for each period simulated. This procedure entails root-finding for each period, which is computationally very expensive. I show that it is possible to avoid this root-finding by not imposing the equilibria each period, but instead by simulating the model without market clearing. The method updates the law of motion for asset prices by using Newton-like methods (Broyden’s method) on the simulated excess demand, instead of imposing equilibrium for each period and running regressions on the clearing prices. Since the method avoids the root-finding for each time period simulated, it leads to a significant reduction in computation time. In the example model, the proposed version of the algorithm leads to a 32% decrease in computational time, even when measured conservatively. This method could be especially useful in computing asset pricing models (for example, models with risky and safe assets) with both aggregate and uninsurable idiosyncratic risk since methods which use linearization in the neighborhood of the aggregate steady state are considered to be less accurate than global solution methods for these particular types of models.
{"title":"Avoiding Root-Finding in the Krusell-Smith Algorithm Simulation","authors":"Ivo Bakota","doi":"10.2139/ssrn.3702256","DOIUrl":"https://doi.org/10.2139/ssrn.3702256","url":null,"abstract":"This paper proposes a novel method to compute the simulation part of the Krusell-Smith (1997, 1998) algorithm when the agents can trade in more than one asset (for example, capital and bonds). The Krusell-Smith algorithm is used to solve general equilibrium models with both aggregate and uninsurable idiosyncratic risk and can be used to solve bounded rationality equilibria and to approximate rational expectations equilibria. When applied to solve a model with more than one financial asset, in the simulation, the standard algorithm has to impose equilibria for each additional asset (find the market-clearing price), for each period simulated. This procedure entails root-finding for each period, which is computationally very expensive. I show that it is possible to avoid this root-finding by not imposing the equilibria each period, but instead by simulating the model without market clearing. The method updates the law of motion for asset prices by using Newton-like methods (Broyden’s method) on the simulated excess demand, instead of imposing equilibrium for each period and running regressions on the clearing prices. Since the method avoids the root-finding for each time period simulated, it leads to a significant reduction in computation time. In the example model, the proposed version of the algorithm leads to a 32% decrease in computational time, even when measured conservatively. This method could be especially useful in computing asset pricing models (for example, models with risky and safe assets) with both aggregate and uninsurable idiosyncratic risk since methods which use linearization in the neighborhood of the aggregate steady state are considered to be less accurate than global solution methods for these particular types of models.","PeriodicalId":433235,"journal":{"name":"DecisionSciRN: Bounded Rationality (Sub-Topic)","volume":"44 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116341391","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Access to credit and financial services of sections of the societies in low-income developing countries has led to the proliferation of genuine and fraudulent microfinance institutions in recent times and this has been the subject of intense interest by researchers. This study explores the sociological and psychological factors that influence investment decisions of individuals with microfinance institutions to maximize their economic wellbeing in spite of the high incidence of atrophy of such institutions and fraud. This is an exploratory research which adopted a descriptive analytic approach in the analysis. In all 165 respondents were purposively selected from five administrative areas in the Brong Ahafo Region in Ghana. The study found that out of the total respondents of 165 who ever engaged in business with microfinance institutions, 119 of them have ever been swindled by microfinance institution. The respondents exhibited herding behaviour in their investment decisions with these fraudulent microfinance institutions. These fraudulent microfinance institutions used interest rate as a conduit to deceive and lure people to save with them. The respondents used bounded rationality in their investment decisions which resulted in the bad investment with these fraudulent microfinance institutions.
{"title":"Herding Behaviour and Investment Decisions of Individuals With Fraudulent Microfinance Institutions in Ghana","authors":"A. Abotsi, Theophilus Edward Richardson","doi":"10.26803/myres.2018.15","DOIUrl":"https://doi.org/10.26803/myres.2018.15","url":null,"abstract":"Access to credit and financial services of sections of the societies in low-income developing countries has led to the proliferation of genuine and fraudulent microfinance institutions in recent times and this has been the subject of intense interest by researchers. This study explores the sociological and psychological factors that influence investment decisions of individuals with microfinance institutions to maximize their economic wellbeing in spite of the high incidence of atrophy of such institutions and fraud. This is an exploratory research which adopted a descriptive analytic approach in the analysis. In all 165 respondents were purposively selected from five administrative areas in the Brong Ahafo Region in Ghana. The study found that out of the total respondents of 165 who ever engaged in business with microfinance institutions, 119 of them have ever been swindled by microfinance institution. The respondents exhibited herding behaviour in their investment decisions with these fraudulent microfinance institutions. These fraudulent microfinance institutions used interest rate as a conduit to deceive and lure people to save with them. The respondents used bounded rationality in their investment decisions which resulted in the bad investment with these fraudulent microfinance institutions.","PeriodicalId":433235,"journal":{"name":"DecisionSciRN: Bounded Rationality (Sub-Topic)","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-11-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131875604","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-09-10DOI: 10.1108/S0742-332220180000039010
R. Bettis, Songcui Hu
Herbert A. Simon and Alan Newell won the Turing Award jointly in Computer Science for foundational work on Artificial Intelligence. Simon also won the Nobel Prize in Economics for the concept of “bounded rationality.” In both cases, the same heuristic was deemed fundamental: “Search till a satisfactory solution is found.” We argue that behavioral strategy can learn a great deal from the Theory of Computational Complexity and Artificial Intelligence. These fields can provide a sounder theoretical grounding for bounded rationality and for the necessity and usefulness of heuristics. Finally, a concept of “organizational intractability” based roughly on the metaphor provided by the Theory of Computational Complexity may be useful in determining what analytical decision technologies are actually intractable in real organizations with constraints on time and managerial attention.
Herbert A. Simon和Alan Newell因在人工智能方面的基础性工作而共同获得了计算机科学奖图灵奖。西蒙还因为“有限理性”的概念获得了诺贝尔经济学奖。在这两种情况下,相同的启发式被认为是基本的:“搜索直到找到满意的解决方案。”我们认为行为策略可以从计算复杂性理论和人工智能中学到很多东西。这些领域可以为有限理性和启发式的必要性和有用性提供更坚实的理论基础。最后,基于计算复杂性理论(Theory of Computational Complexity)提供的隐喻的“组织难处理性”概念,可能有助于确定在时间和管理注意力受限的真实组织中,哪些分析决策技术实际上是难以处理的。
{"title":"Bounded Rationality, Heuristics, Computational Complexity, and Artificial Intelligence","authors":"R. Bettis, Songcui Hu","doi":"10.1108/S0742-332220180000039010","DOIUrl":"https://doi.org/10.1108/S0742-332220180000039010","url":null,"abstract":"Herbert A. Simon and Alan Newell won the Turing Award jointly in Computer Science for foundational work on Artificial Intelligence. Simon also won the Nobel Prize in Economics for the concept of “bounded rationality.” In both cases, the same heuristic was deemed fundamental: “Search till a satisfactory solution is found.” We argue that behavioral strategy can learn a great deal from the Theory of Computational Complexity and Artificial Intelligence. These fields can provide a sounder theoretical grounding for bounded rationality and for the necessity and usefulness of heuristics. Finally, a concept of “organizational intractability” based roughly on the metaphor provided by the Theory of Computational Complexity may be useful in determining what analytical decision technologies are actually intractable in real organizations with constraints on time and managerial attention.","PeriodicalId":433235,"journal":{"name":"DecisionSciRN: Bounded Rationality (Sub-Topic)","volume":"153 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-09-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122769072","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We discuss the effect of pricing strategies by two firms on the total firm revenue, consumer and total welfare using simulation and numerical analysis. We consider pricing decisions for mixed bundling and where each firm offers two closely related products as well as a bundle. Bundling is a key feature for information goods (Bakos & Brynjolfsson, 1999; Shapiro & Varian, 1999) and we might assume that the market has two differentiated content products (each of which is a bundle of channels, for example, or a bundle of content titles to which access is sold). In many markets, this would be a basic entertainment product and then a sports product or a premium bundle with recent films etc. We can also consider this to be an access and a content product, to consider the issues around merger of content and access firms. In the model for this paper, we introduce a principle of bounded rationality by limiting the ability of the firms to determine revenue-maximising pricing strategies. That means that the firms are able to reduce their effort to find a revenue optimum and will in general find a relatively good solution only but not necessarily an optimum one. Considering the effects of this approach might be useful for both regulators and firms. We also assume that the firms collude to maximise their joint revenue, which we regard as a realistic supposition in a duopoly market. The model can be extended to cover the case where one firm offers/bundles more than two products but this is a topic for future research.
{"title":"Bundling Information Goods and Access – Simulating Competition","authors":"Bronwyn E. Howell, P. Potgieter","doi":"10.2139/ssrn.3368062","DOIUrl":"https://doi.org/10.2139/ssrn.3368062","url":null,"abstract":"We discuss the effect of pricing strategies by two firms on the total firm revenue, consumer and total welfare using simulation and numerical analysis. We consider pricing decisions for mixed bundling and where each firm offers two closely related products as well as a bundle. Bundling is a key feature for information goods (Bakos & Brynjolfsson, 1999; Shapiro & Varian, 1999) and we might assume that the market has two differentiated content products (each of which is a bundle of channels, for example, or a bundle of content titles to which access is sold). In many markets, this would be a basic entertainment product and then a sports product or a premium bundle with recent films etc. We can also consider this to be an access and a content product, to consider the issues around merger of content and access firms. In the model for this paper, we introduce a principle of bounded rationality by limiting the ability of the firms to determine revenue-maximising pricing strategies. That means that the firms are able to reduce their effort to find a revenue optimum and will in general find a relatively good solution only but not necessarily an optimum one. Considering the effects of this approach might be useful for both regulators and firms. We also assume that the firms collude to maximise their joint revenue, which we regard as a realistic supposition in a duopoly market. The model can be extended to cover the case where one firm offers/bundles more than two products but this is a topic for future research.","PeriodicalId":433235,"journal":{"name":"DecisionSciRN: Bounded Rationality (Sub-Topic)","volume":"106 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-05-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114931703","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}