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A New Way to Spot the Next Financial Crisis – WSJ

Simudyne has been featured in the Wall Street Journal.

Check out the full article here.

Excerpt

The previous method for modeling the financial world was shown to have huge blind-spots during the 2008 crisis. People didn’t behave in the rational ways economists had assumed and supposedly freak events appeared with alarming frequency. Investors and regulators have been hunting for alternatives ever since.

The latest candidate is “agent-based” modeling. U.K.-based startup Simudyne has joined with U.S. federally-funded research company Mitre Corp to turn an agent-based model of asset fire-sales and investor flight from banks and funds into a commercial product. They are using the building blocks of a model of the U.S. financial system that Mitre built for the U.S. Treasury.

Traditional financial models assumed that rational, well-informed people acted in efficient markets, allowing economists to analyze markets relatively simply with a few generalized rules. Agent-based modeling instead simulates market activity by creating dynamic computer programs with lots of agents, such as investors and banks, and seeing what happens when they interact.

Agents can be rational or irrational, greedy or fearful, and have all sorts of restrictions and motivations. Their actions and reactions are played out thousands of times over different time scales.

Chloe Hibbert