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Agent-based Models of a Banking Network as an Example of a Turbulent Environment: The Deliberate v. Emergent Strategy Debate Revisited By Duncan A. Robertson.

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Presentation on theme: "Agent-based Models of a Banking Network as an Example of a Turbulent Environment: The Deliberate v. Emergent Strategy Debate Revisited By Duncan A. Robertson."— Presentation transcript:

1 Agent-based Models of a Banking Network as an Example of a Turbulent Environment: The Deliberate v. Emergent Strategy Debate Revisited By Duncan A. Robertson Discussed by Brandon Chen School of Banking and Finance, Australian Business School, UNSW

2 Banking Strategy In the past focus has been on the role of banks as intermediaries But banks also look for -Profit maximisation -Shareholder value-added -Survival in the marketplace

3 Strategic Dimensions for Banking Strategic groups : groups of firms that follow similar strategies with regard to one or more strategic dimensions Some generic strategic dimensions incl: -Product lines (degree of product diversification/differentiation) -Degree of vertical integration -Investment behaviour -Relative size of firm (leader/follower class), etc.

4 Strategic Dimensions for Banking N-dimensional strategy space The location and movement used of a firm within the space describing that firm’s strategy Position the value-generating assets  sustainable competitive advantage # of customers the bank’s profit Banks and Customers in the same space

5 Emergent v. Deliberate Debate Deliberate strategies: intentions are fully realised Emergent strategies: a realised pattern was not expressly intended Bounded rationality: agents act in a way that is not completely rational due to the uncertainty of the future and costs of acquiring information Bottom line: managers learn along the way

6 Turbulence Def: The dynamic of the environment, i.e. the rate at which these configurations change over time is the other key determinant of turbulence (Charkravarthy 1997). Complex world calls for models/paradigms not relying on linearity, equilibrium and stability

7 Turbulence In this context, turbulence comes from changes in the links with customers Extended to include changes in the strength of interaction between banks and customers By the rapid introduction/removal of new agents from the strategy space (ease of entry and increasing returns to scale both contribute to turbulence, Charkravarthy)

8 ABM for banking strategy within a turbulent environment From the point of view of individual firms Two agents: banks and customers Feedback between the firm (bank) and the environment (customers) Changes in the environment: Changes in the links the bank has with its customers

9 ABM for banking strategy within a turbulent environment Figure 1 Location of banks (B) and customers (C) in the strategy hypercube Have a set of requirements that determine his position in the strategy space According to their strategies they adopt in the strategy space

10 ABM for banking strategy within a turbulent environment Customers select banks closet to them in strategy space. However, they are not purely rational: they may decide to bank with a firm not closet to them as long as this meets a min satisfaction level (bounded rationality)

11 Parameterisation of the Model Customers:  Satisfaction level: s (associated with distance btwn customer and bank);  min cut-off s*  bounded rationality of customer  S are compared with S* at each time step: customers won’t switch, if S

12 Parameterisation of the Model Banks:  To maintain competitive advantage: maintaining relationships with the customers  Assume other banks are stationary  3 strategies open to the bank: (i) Stay still; (ii) Follow the lead bank; (iii) Move to the centre of mass of its customers.

13 Parameterisation of the Model Turbulence:  Customers are either (i) stay still (non-turbulent) (ii) random walk (turbulent)

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15 Results 1: (control result) Strategy: Stay still (a deliberate strategy) Little effect of customers’ s*: on average the customers are likely to be distributed evenly among banks

16 Results II Strategy: Follow the Leader (an emergent strategy) The efficacy of such strategy depends on s* Very rational Hardly switch (very loyal)

17 Results III Strategy: Customer-Centric (an emergent strategy) This strategy works better in a turbulent market

18 Comments Management literature built on economics, sociology, psychology Quick paradigm shifts within the discipline ABM fits the description: allowing models to be altered to fit the level of abstraction required fro a different industry or a different problem Tackle one specific question without controlling for other factors (Not GE) But a good paper in illustrating how ABM can be applied in management science


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