Emergence of macro-variables by evaluation and clustering of micro- activities

Otto Loistl

The European Journal of Finance, 2015, vol. 21, issue 9, 691-713

Abstract: Recent finance and economic forecasting and risk calculation failures made obvious that macro-modelling without micro-foundation may be treacherous. Reliable macro-modelling requires the consistent bundling of individual actions into intermediate and macro-variables exploiting the individual actions' coordination and its dynamics. The degree of coordination may range from chaos - absence of coordination - to determined situations caused by macro-level equilibrium dictating any agent's actions and inhibiting interactions. Coordination clusters individual actions into real decision units such as companies, political parties and unions. It structures the emergent intermediate and macro-level situations vitally.The paper presents first a centennial history of prominent scholars' quotes questioning the equilibrium paradigm, a short survey of prevailing paradigm's deficiencies laid bare once again by the latest financial crises.It proposes second discrete choice (DC) - successfully applied in different fields - to model the individual agent's decision. DCs innovative integration into a Markov process provides a steady foundation to model interactions of individual agents consistently.The final section justifies the actions' proposed interactive bundling by referring to recent advances in data processing and network topology. The dynamic modelling of the actions' and interactions' coordination breaks fresh grounds both with regards to mathematical, computational and economic modeling requirements. The combination of latest developments in data processing like Big Data and the recently (re)discovered network topology capabilities may cope with these challenges.

Date: 2015
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DOI: 10.1080/1351847X.2013.871737

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