Finance theory continues to develop beyond the traditional
academic precincts of rational expectations and efficient
markets, with the latest innovations coming from psychology, neuroscience and
J. Doyne Farmer is making his mark by thinking outside the
box as well. Farmer is a professor of mathematics at the
University of Oxford and a director of the program on
complexity economics at the Institute for New Economic
Thinking. Additionally, he is an external professor
at the Santa Fe Institute, a private, nonprofit research
organization. But Farmer was originally trained as a
physicist. In the 1980s he worked at the Los Alamos National
Laboratory, home of the Manhattan Project, where scientific
luminaries like J. Robert Oppenheimer and Richard Feynman once
plied their trade. At Los Alamos Farmer founded the Complex
Systems Group in the theoretical division.
In 1991, he co-founded the Prediction Company, a
quantitative trading firm about which University of Chicago
professor and architect of the Efficient Market Hypothesis
Eugene Fama said: Prediction Companys chance of
success is not zero, but close to it. The firm would
prove Fama wrong, however, and was purchased by Swiss banking
giant UBS in 2005.
At the Santa Fe Institute, Farmer is looking for laws in
financial markets that can help explain what drives the
stability and performance of the banking system.
Over his career Farmer has collaborated with prominent
academics such as MIT Sloan School of Management finance
professor Andrew Lo whose Adaptive Markets Hypothesis
attempts to reconcile Famas hypothesis with the realities
of human behavior through the application of evolutionary
biology and Yale University economics professor John
Geanakoplos, a noted contributor to the general equilibrium
branch of economics.
Currently, Farmer is working on a different method of
understanding market behavior: agent-based modeling
simulations of financial market participation by investors.
This work requires gathering and coding an enormous amount
of data and creating a library of information of sorts from
which to simulate interactions of agents in financial markets.
Farmers background in dynamical systems theory,
time-series prediction and chaos theory coupled with his newer
work with complex systems and financial economics has aided him
in his effort to simulate and analyze the individual actions of
and interactions between agents on a marketwide basis.
Farmer is also the scientific coordinator of CRISIS, a
large-scale European Union project to build an agent-based
model of the banking system and the real economy.