Forward-looking expectations in Vensim

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ema
Junior Member
Posts: 7
Joined: Wed Mar 07, 2018 8:12 am
Vensim version: DSS

Forward-looking expectations in Vensim

Post by ema »

Dear admins,

as part of the macro modelling work I mentioned in my previous post, one of our main aims is to move away from adaptative expectations and introduce forward-looking ones.

The simple version of the problem is the following. We have a sector producing goods to satisfy an exogenous demand. This demand moves with time, but the sector does not know exactly how. The sector does however form expectations around the likely evolution of demand in the future (at the moment, they expect demand to move to a new exogenous steady-state value in a certain amount of periods following a logistic path).

We would like the sector to invest (today) according to the expected changes of demand in the future. More specifically, we would like to introduce a behavioural rule so that the sector would invest in a way to smoothly maintain its capital stock fully utilised. In order to do this (and study how different discount rates might affect the path of investments), we would like to take the net present value of the expected future changes in capital stock (the ones needed to maintain at full capacity), and use it to determine today's investments. However, this doesn't seem to be possible, because, at time t, we don't know what the future stream of expected capital changes will be, as it will be calculated only once the model runs.

What we are looking for is a method to, in each time step, calculate the path of future expected capital changes, actualise it and use it to calculate investments. This can't be done only once at the beginning of the process, as in the following period actual demand changes might be different from the expected ones and the sector might not be at full capacity utilisation as desired. So in each period we need to recalculate the sector's expected future path of capital stock changes, adjusting depending on the discrepancy between expectations and reality.

How would you suggest to do this? We see no clear method. We thought of having a model only for the formulation of expectations, export it to excel and then use this in the main model; but this would work only if we needed to do it just once, while we need to do the calculation every period. We thought of creating a large amount (equal to the periods of the transition) of simultaneous variables and use those for the actualisation, but this seems like a very cumbersome solution (we would have to create 50+ variables). We thought the optimisation tool might be useful, but we are not entirely sure how.

Any advice would be greatly appreciated.

All the best,
Emanuele
LAUJJL
Senior Member
Posts: 1421
Joined: Fri May 23, 2003 10:09 am
Vensim version: DSS

Re: Forward-looking expectations in Vensim

Post by LAUJJL »

Hi

Your explanation needs some précisions.


Joined a simplistic model that can be taken as a starting point.

Regards.

JJ
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ema
Junior Member
Posts: 7
Joined: Wed Mar 07, 2018 8:12 am
Vensim version: DSS

Re: Forward-looking expectations in Vensim

Post by ema »

Dear JJ, many thanks for your kind reply! We still hadn't thought about using lookup functions.

My first feeling is that this will not work, as the lookup function would need to be updated in very period. What firms at time t expect for demand in t+1 might not be right; if this is the case, the path of future expected demand at time t+1 will need to change. But I will think more about it over the weekend and play around with your model.

All the best, and thanks again.
Emanuele
LAUJJL
Senior Member
Posts: 1421
Joined: Fri May 23, 2003 10:09 am
Vensim version: DSS

Re: Forward-looking expectations in Vensim

Post by LAUJJL »

Hi
An expectation is always different from what happens.
If the expectation changes every time period, one should think about how the expectation is built and shat is expected. for instance what is the horizon of the expectation.
What is influencing the expectation? Generally it is one or more levels, in fact the state of the system when the expectation is made, the state of the current information about the system being part of that state.
Another point to consider: is the expectation depending on some policies chosen every time step, these policies being chosen too from the state of the system?
Another point to consider: is the system deterministic or stochastic. Deterministic meaning that the system is not seriously influenced by some hazards, something that happens often in classical SD where aggregated points of views nullify the effect of hazard.
Regards.
JJ
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