Click here to download a .pdf version of this newsletter.

Return to Main Page


Brainstorms
The Agents Are Coming
Donald F. Mango 

   


If you have seen the enormously popular software   The Sims, you were probably intrigued, but you may not have realized   that you were looking at part of a scientific revolution involving adaptive agents. Adaptive agents are   software entities that, when placed in a computer environment, monitor the state of that environment, and, armed with rules of behavior, interact with   it. In the case of The Sims, the agents are people of various types, placed in a house or hotel or city, interacting in ways   both mundane and hilarious. One of the key elements to the popularity of The Sims is its complete unpredictability. There   is literally no way to predetermine the aggregate result of placing a certain set of Sims in a certain environment with   certain initial conditions. The only way to find out what will happen is by   watching the situation unfold.   

The adaptive agent paradigm (AAP) is gaining momentum in many areas of science: financial markets, water policy,   organizational and network theory, and the military. In fact, leadership methods used in Project Iraqi Freedom were developed   using adaptive agents—the "army of one" philosophy. To jump start your exposure, see the outstanding set of papers presented at   the National Academy of Sciences 2001 Sackler Colloquium, "Adaptive Agents, Intelligence, and Emergent Human   Organization: Capturing Complexity through Agent-Based Modeling," online at   www.pnas.org/content/vol99/suppl_3. Another good site   is "Agent-Based Computational Economics" at   www.econ.iastate.edu/tesfatsi/index.cfm?fa=ace.   

In the financial and economics world, AAP is developing alongside behavioral finance. Both schools are challenging   the neoclassical economics assumptions of completely rational, homogeneous representative agents, operating in   equilibrium, maximizing their utility, resulting in analytically solvable models for the economists. AAP involves concepts of   bounded rationality (i.e., potentially inconsistent behavior), heterogeneous agents, and self-organized or emergent complexity   (unpredictable patterns and aggregate results) where problems require   computational solution.   

The philosophy of science in general has not caught up with this notion of computational solution. It potentially   represents a third valid "symbol system" for research and scientific communication (the others being Verbal and Mathematical).   

Impact on Actuarial Science
What might this mean for our science? Here are some speculations:

1.    Forced group interaction (similar to multiplayer gaming): the days of the isolated practitioner are limited.

2.    Software as research product: software will have formal recognition as a communication medium. The CAS may   institute calls for software alongside calls for papers.

3.    Policy analysis: regulators could use this as a means of testing the impact of policy changes (e.g., fair value accounting).   

4. Test Impact of Changes: Allow testing of the aggregate effects of changes in rates, class plans, laws, or agent   compensation in order to determine   beforehand the likely impact of changes.

The difficult part in all adaptive agent modeling is modeling the behavioral rules of the agents themselves. For example,   in order to model the policyholder retention impact of changes in rates, you might need a demand curve. While it may   appear daunting, recent research in behavioral finance indicates that good results are achievable from modest assumptions.   Most people's decision processes can be modeled reasonably well by a few simple rules. The key task for actuaries is to   begin formulating those rules.   


   

Click here to write a Letter to the Editors

Copyright © 2014 Casualty Actuarial Society. All Rights Reserved.