Software Wind Tunnels for Testing Markets, Policies and Strategies

This is an interdisciplinary research. Researchers include members of the Bounded Rationality Advancement in Computational Intelligence Laboratory (BRACIL), Centre for Computational Finance and Economic Agents (CCFEA), Centre for Computational Finance (CCI), British Telecom and external consultants.
See full list of group members.

Designers of racing cars and aeroplanes today would typically put their designs through wind tunnel testing. Why shouldn't new markets and economic policies go through the same stringent tests before they are implemented?

New markets are being designed all the time; examples include e-bay, the electricity market and traffic markets. The robustness and efficiency of these market affect the society. Many business strategies determine the success or failure of an enterprise. It is inconceivable to put these markets and strategies into operation without testing them scientifically; e.g. to understand their impacts, or to ask what-if questions.

Agent-based market modelling allows one to "wind tunnel test" strategies and market designs. No model is perfect, and no amount of testing will guarantee the success of a strategy or market. However, agent-based models enable us to scientifically test complex behaviour and their interactions.

Vernon Smith (Economics Nobel Prize laureate, 2002) pioneered the idea of wind tunnel testing new auction designs. In BRACIL, we have conducted application studies in card payment market and BT's work force scheduling. Theoretical studies include artificial market and automated bargaining.

Projects (publications):
Wind tunnel testing for Staff Empowerment
Staff empowerment is a management concept. The idea is to, within limit, give staff control over their work, with the aim to improve job satisfaction. It is hoped that improved job satisfaction will lead to increased productivity. The whole idea is based on the management philosophy that for an enterprise to succeed, everybody must have something to gain. Under this philosophy, the management's role is to define policies that could lead to all-win situations. We propose to put these policies through wind tunnel tests before they are implemented.
Card Payment Market Electronic payment is the norm in some countries, but is only starting in others. The card payment market is complex. It requires the willing participation of card issuers, merchants and customers. Models of the card payment market has been proposed, but they were only studied based on observations or small scale experimentation through human subjects. We have implemented a model and studied the equilibrium under different market conditions. We have also used evolutionary computation to evolve strategies for card issuers to maximize their market share or profit.
Artificial Stock Markets By modelling the behaviour of the participants in a particular market, one can attempt to study the market's dynamics and predict market equilibrium. We have identified conditions under which the prices in an artificial market share similar statistical properties as those in real markets. This does not mean that we have fully understood how prices change in a real market. However, it does give us means of better understanding the market mechanism and testing trading strategies.
Related project:
Automated Bargaining
Game theory is an important subject in many disciplines, such as economics, business, sociology. Game theory is relevant to wind tunnel research if agents may bargain with each other. Traditionally, equilibriums in bargaining are derived mathematically. Such derivations assume that players are fully rational. Unfortunately, this is not always true. Besides, mathematical derivations are often laborious. In order to relax the full rationality assumption, and to study more complex bargaining scenarios, we take an evolutionary approach. Experimental results so far show that evolutionary computation is an effective way to approximate equilibriums in bargaining.

Maintained by Edward Tsang; Last updated 2007.11.26