Thesis research at University of Minnesota (1974-1975) on Games, Goals, and Bounded Rationality
-
The key idea of the followings thesis is that boundedly-rational decision-makers can supplement partial contingency plans with goals, thus permitting actions to be undertaken in desired directions despite the absence of complete information. An expected utility model permitting goal-directed action choice is formulated and axiomatized for concrete demonstration.
-
Leigh Tesfatsion (1975), Two Essays on Individual Choice
(pdf,2.5MB),
PhD Thesis, Department of Economics, 76-15,007 University of Minnesota, Mpls., December.
Work at University of Minnesota (1974-1975) and USC (1975-1984) on Criterion Filtering (CF)
-
The following question arises for sequential decision-making under uncertainty: Can the associative mapping between decisions and expected payoffs be directly updated, without recourse to the updating of probabilities?
-
Criterion Filtering (CF) provides an affirmative answer to this question. CF is a learning algorithm that permits the direct updating of expected utility on the basis of sequentially realized utility outcomes, conditional on prior (initial) utility assessments. The CF algorithm thus provides a "Bayes' Rule for Utility".
-
Criterion Filtering (CF): A Dual Approach
to Bayesian Inference and Adaptive Control
Work at USC (1975-1990) on Flexible Least Squares (FLS)
-
Flexible Least Squares (FLS) is a multicriteria optimization method for model specification. The goal of the FLS method is to identify the "Pareto frontier" of all efficiently estimated models conditional on: (i) a given theory; (ii) a given data set; and (iii) a designated collection of goodness-of-fit metrics. FLS does not require the ad-hoc specification of conventional stochastic assumptions for "residual error terms" that in fact arise from deterministic model misspecification.
-
Flexible Least Squares (FLS): A Multicriteria Optimization Method for Model Specification
Work at USC (1975-1990) on Adaptive Computation
-
An adaptive computation method adapts to the problem at hand rather than requiring the problem to be adapted to the method.
During 1975-1990 applied mathematician Robert E. Kalaba and I developed adaptive computation methods for the solution of various types of nonlinear systems.
-
For example, we developed an adaptive homotopy solution algorithm able, in runtime, to detect and avoid regions where calculations are ill-conditioned due to nearby singularities or bifurcation points. This adaptive capability is achieved by replacing the standard homotopy continuation parameter, moving in a pre-set manner from 0 to 1 along the real line, with a "smart agent" able to construct and traverse an adaptively determined path from 0+0i to 1+0i in the complex plane. The smart agent decides the direction and length of its next step, given its current state, by solving a multi-criteria optimization problem requiring a trade-off between two criteria: (i) maintain a short path length from 0+0i to 1+0i; and (ii) avoid regions in the complex plane where ill-conditioning of calculations is detected.
-
Adaptive Computation Methods for Nonlinear Systems
Work at USC (1975-1990) and ISU (1990-present) on
Modeling of Economies as Open-Ended Dynamic Systems
- This work includes, for example, the modeling of macroeconomies as DSGL systems, where
DSGL = DSG(~E) + Learning Agents.
-
More precisely, DSGL systems are open-ended dynamic stochastic market-based systems for which decision-making agents have learning capabilities. Equilibrium arises endogenously (if at all) in DSGL systems as a result of successive agent interactions, not from the external imposition of common knowlege and coordination assumptions.
-
Optimality and Efficiency of
Open-Ended Dynamic Economies
Work at ISU (1990-2001) on the Blending of Game Theory with Matching Theory
-
Trade network games are explored for concrete demonstration. The sequential choice and refusal of trade partners (matching theory) is modeled, together with the sequential determination of trade strategies (evolutionary game theory). At the start-time for each successive trading period, traders direct trade offers to preferred trade partners and preferentially accept or refuse trade offers received from other traders,
based on their own current states (data, attributes, and/or methods). Each matched pair of traders then participates in a trade process modeled as a two-player game, using trade strategies each has selected to maximize their own expected net gain conditional on their own current state. At the completion of these trade processes, each trader adaptively updates their own current state based on trade outcomes they have experienced or observed during this latest trading period.
-
The Trade Network Game (TNG) Laboratory is open-source demonstration software permitting the beautiful run-time visualization of endogenous trade-network formation among strategic traders (buyers, sellers, and/or dealers) in a sequential trade network game.
-
Endogenous Trade Network Formation
and the TNG Laboratory
Work at ISU (1990-present)
on Completely Agent-Based Modeling (c-ABM)
and Agent-based Computational Economics (ACE)
-
Scientists and engineers seek to understand how real-world systems work, and how real-world systems could work better. Any modeling approach devised for such purposes must simplify reality. Ideally, however, the modeling approach should be flexible as well as logically rigorous; it should permit model simplifications to be appropriately tailored for the specific purpose at hand.
-
Modeling flexibility and logical rigor have been the two key goals motivating my development of
completely Agent-Based Modeling (c-ABM) and
Agent-based Computational Economics (ACE)
for science-with-practice research. c-ABM
is a variant of agent-based modeling characterized by seven modeling principles. Any model adhering to these seven modeling principles is a computational laboratory permitting explorations of computational systems in a manner analogous to biological experimentation with cultures in Petri dishes. The ACE modeling approach is a specialization of c-ABM to economic systems.
-
c-ABM: The Right Mathematics for Social Science?
-
ACE Homepage
Work at ISU (1998-present) on Design and Performance of
U.S. RTO/ISO-Managed Wholesale Power Markets
-
Power supplies and demands in grid-supported U.S. RTO/ISO-managed wholesale power markets are becoming increasingly volatile and uncertain due to: (i) increasing reliance on weather-dependent power suppliers (e.g., wind and PV solar facilities); and (ii) increasingly diverse power customers. This volatility and uncertainty is hindering the ability of RTOs/ISOs to ensure continual nodal balancing of power supplies and demands, a necessary requirement for grid reliability.
Below are linked materials that summarize research I have conducted on proposed design improvements for these markets.
-
Leigh Tesfatsion (2023), "Economics of Grid-Supported Electric Power Markets: A Fundamental Reconsideration"
(WP,pdf),
(KeyPoints,pdf),
(SlideSetShort,pdf),
(YouTube,FERC Day 2,7:34:00),
(SlideSetLonger,pdf),
Supporting Document (Attachment A) for Comments (Accession No. 20230117-5051), U.S. Federal Energy Regulatory Commission (FERC) Docket AD21-10-000 ("Modernizing Wholesale Electric Power Market Design"), January.
-
Leigh Tesfatsion (2023), Linked Listing
(pdf,190KB)
of publications, reports, and presentations on the
design and performance of U.S. RTO/ISO-managed wholesale power markets.
Work at ISU (2006-present) on Design and Performance of
Integrated Transmission and Distribution (ITD) Systems
-
FERC Order 2222 (Final Rule) -- released by the U.S.
Federal Energy Regulatory Commission in September 2020 -- encourages increased participation in U.S. RTO/ISO-managed wholesale power markets by locally-managed aggregations of distribution-level customers.
Transactive Energy System (TES)
design, pioneered by researchers at the Pacific Northwest National Laboratory, provides provides important support for FERC Order 2222 objectives. A
TES design
is a collection of economic and control mechanisms that allows the dynamic balancing of power supply and demand across an entire electrical infrastructure, using value as the key operational parameter.
-
The following project site provides pointers to my collaborative research on the conceptualization and performance testing of TES designs for
Integrated Transmission and Distribution (ITD) systems, supported by the development of agent-based computational platforms capturing salient features of actual U.S. ITD systems.
-
ITD Project: ISU Homepage
Work at ISU (2011-present) on a new proposed Linked Swing-Contract Market Design for U.S. RTO/ISO-Managed Wholesale Power Markets
-
The proposed Linked Swing-Contract Market Design
includes three innovative features to facilitate the efficient and reliable operation of U.S. RTO/ISO-managed wholesale power markets as they transition to decarbonized grid operations with increasingly diverse participants. These three features can be succinctly summarized, as follows, in comparison with the current reliance of these markets on Locational Marginal Pricing (LMP):
More emphasis on L; Less emphasis on M; Dynamic insurance-based valuation in place of P.
-
More precisely, the first innovative feature is a fundamental change in the current conceptually-problematic focus on grid-delivered energy (MWh) as the basic transacted product. Under the proposed design, the basic transacted product is conceived to be a nodal power-path, i.e., a sequence of injections and/or withdrawals of power (MW) that take place at a single designated grid location during a designated operating period. The latter product conceptualization permits market design features to be envisioned and developed from the distributed localized vantage points of market participants as well as the centralized vantage point of the RTO/ISO, thus facilitating incentive alignment.
-
The second innovative feature is a fundamental change in the current contractual forms for supply offers. Under the proposed design, dispatchable power resources participate as reserve suppliers in a linked collection of forward reserve markets M(T) for future operating periods T.
Reserve for T consists of the guaranteed availability of nodal power-path production capabilities for possible RTO/ISO dispatch during T. Reserve suppliers are permitted to submit their supply offers in a two-part pricing swing-contract form. The "swing" (flexibility) in these supply offers facilitates flexible reserve availability, enabling efficient RTO/ISO dispatch of just-in-time nodal power-path deliveries to meet just-in-time nodal customer power demands and grid reliability requirements. The two-part pricing feature of these supply offers permits suppliers to ensure their revenue sufficiency.
-
The third innovative feature is a fundamental
change in the current primary focus of the RTO/ISO on short-run markets for grid-delivered energy, supported by ancillary services and supplemental capacity commitment and procurement processes. Under the proposed design, the primary role of the RTO/ISO is envisioned to be the advance procurement of physically-covered insurance (reserve) in linked forward reserve markets M(T) for protection against volumetric grid risk during future operating periods T.
The look-ahead horizon LAH(T) between the close of a market M(T) and the start of T can range in duration from years to seconds, as can the duration of T itself.
-
Leigh Tesfatsion (2021), A New Swing-Contract Design for Wholesale Power Markets, John Wiley & Sons, Inc. (IEEE Press Series on Power Engineering), Hoboken, New Jersey, USA, 288pp.
(BookReview,pdf),
(FERCTalk,SlideSet,pdf),
(WileyBookFlyer,pdf).
Work at ISU (2023-present) on Many-to-One Economic and Physical Measurement Issues for U.S. RTO/ISO-Managed Wholesale Power Markets
-
Locational Marginal Price (LMP) settlements for grid-delivered energy in U.S. RTO/ISO-managed wholesale power markets are conceptually problematic due to a fundamental many-to-one measurement problem for benefit/cost valuations.
-
LMP settlements assign unique per-unit prices
LMP(b,T) ($/MWh) to amounts E(b,T) (MWh) of grid-delivered energy, conditional on grid delivery location b and delivery period T. The conceptually-coherent derivation of these per-unit prices depends on an assumed unit homogeneity property: namely, given E(b,T), each trader must consider all possible "next" units (MWh) of grid-delivered energy at b during T to be perfect substitutes for each other.
-
In reality, however, the benefit/cost valuation that a market participant or RTO/ISO assigns to each possible "next" unit (MWh) of grid-delivered energy at b during T, given E(b,T), will typically depend strongly on the dynamic properties of the power-path used to implement the delivery of this "next" unit -- for example, the power-path's ramp-rate profile at b during T. Thus, any attempt to determine a single per-unit price LMP(b,T) ($/MWh) for a grid-delivered energy amount E(b,T) (MWh) at b during T could entail serious mis-measurement of the true benefit/cost valuations of market participants and system operators. This issue is carefully considered in the following study:
-
Leigh Tesfatsion (2024), "Locational Marginal Pricing: A Fundamental Reconsideration," IEEE Open Access Journal of Power and Energy, Vol. 11 (Feb), pp. 104-116. DOI: 10.1109/OAJPE.2024.3361751. The IEEE Xplore open-access posting of this refereed published paper is available
here.
-
Members of an IEEE Working Group tasked with the revision of the IEEE Standard 1459 (2019) definitions for four key power concepts -- active power, reactive power, apparent power, and power factor -- have recently concluded that important physical operational issues for electric power networks can be traced back to fundamental many-to-one measurement problems associated with these definitions. Briefly stated, these definitions -- expressed in static Root-Mean-Square (RMS) time-averaged form for an electric power network during a conventionally designated time-interval T -- can correspond to multiple underlying dynamic realities with important distinct effects on the actual physical operation of the electric power network during T.
-
The primary goal of U.S. RTO/ISO-managed wholesale power markets is to assign measured economic benefit/cost valuations to measured physical power-path deliveries in a manner that ensures grid operations are both economically efficient and physically reliable. Consequently, in such contexts, many-to-one measurement problems for economic benefit/cost valuations are essentially conjoined with many-to-one measurement problems for physical power concepts.
-
Implications of these conjoined economic and physical many-to-one measurement problems for the design and operation of U.S. RTO/ISO-managed wholesale power markets are currently being researched.
Selected Publications and Reports
-
Leigh Tesfatsion (2024), "Locational Marginal Pricing: A Fundamental Reconsideration,"
IEEE Open-Access Journal of Power and Energy, Vol. 11 (Feb), pp. 104-116. DOI: 10.1109/OAJPE.2024.3361751. The IEEE Xplore open-access posting of this refereed published paper is available
here.
-
Leigh Tesfatsion (2023), "Economics of Grid-Supported Electric Power Markets: A Fundamental Reconsideration"
(WP,pdf),
(KeyPoints,pdf),
(SlideSetShort,pdf),
(YouTube,FERCDay2,7:34:00),
(SlideSetLonger,pdf),
Supporting Document (Attachment A) for Comments (Accession No. 20230117-5051) e-filed to U.S. Federal Energy Regulatory Commission (FERC) for Docket AD21-10-000 ("Modernizing Wholesale Electric Power Market Design"), January.
-
Leigh Tesfatsion (2023), "Agent-Based Computational Economics: Overview and Brief History"
(Preprint,pdf,170KB),
(SSCKeynote,pdf,1.5MB),
Chapter 4 (pp. 41-58) in: Ragupathy Venkatachalam
(Ed.), Artificial Intelligence, Learning and Computation in Economics and Finance,
Springer Cham, 1st Edition (Feb 2023), 325pp.
-
Leigh Tesfatsion (2021), A New Swing-Contract Design for Wholesale Power Markets
(BookReview,pdf),
(FERCTalk,pdf),
(WileyBookFlyer,pdf),
John Wiley & Sons, Inc. (IEEE Press Series on Power Engineering), Hoboken, New Jersey, USA, 288pp.
-
Swathi Battula, Leigh Tesfatsion, and Zhaoyu Wang (2020), "A Customer-Centric Approach to Bid-Based Transactive Energy System Design"
(IEEEPreprint,pdf,1.2MB),
(SlideSet,pdf,3.8MB),
IEEE Transactions on Smart Grid 11(6), 4996-5008.
DOI: 10.1109/TSG.2020.3008611
-
Leigh Tesfatsion (2018), "Electric Power Markets in Transition: Agent-Based Modeling Tools for Transactive Energy Support"
(Preprint,pdf,3.6MB),
Chapter 13 (pp. 715-766) in Cars Hommes and Blake LeBaron (eds.), Handbook of Computational Economics 4: Heterogeneous Agent Models, Handbooks in Economics Series, North Holland (Elsevier), Amsterdam, the Netherlands.
- Leigh Tesfatsion (2017), "Modeling Economic Systems as
Locally-Constructive Sequential Games"
(WP,pdf,605KB),
(SlideSet,pdf,1MB),
Journal of Economic Methodology, Vol. 24, Issue 4, 384-409.
-
Leigh Tesfatsion, Chris R. Rehmann, Diego S. Cardoso, Yu Jie, and William J. Gutowski (2017), "An Agent-Based Platform for the Study of Watersheds as Coupled Natural and Human Systems"
(WP,pdf,1.2M),
Environmental Modelling & Software, Vol. 89, March,
40-60.
- Ekaterina Sinitskaya and Leigh Tesfatsion (2015), "Macroeconomies as Constructively Rational Games"
(WP,pdf,1.3MB),
Journal of Economic Dynamics and Control, Vol. 61, December, 152-182.
-
Paul Borrill and Leigh Tesfatsion (2011), "Agent-Based Modeling: The Right Mathematics for the Social Sciences?"
(WP,pdf,3.5MB),
pages 228-258 in J.B. Davis and D.W. Hands (eds.), Elgar Companion to Recent Economic Methodology, Edward Elgar Publishers, 560pp. ISBN-13: 9781848447547
-
Hongyan Li and Leigh Tesfatsion (2011), "ISO Net Surplus Collection and Allocation in Wholesale Power Markets Under Locational Marginal Pricing"
(WP,pdf,822KB),
IEEE Transactions on Power Systems,
Vol. 26, No. 2, 627-641.
- Blake LeBaron and Leigh Tesfatsion (2008), "Modeling Macroeconomies as Open-Ended Dynamic Systems of Interacting Agents"
(preprint,pdf,45KB),
American Economic Review (Papers & Proceedings), Vol. 98, No. 2, 246-250.
- Leigh Tesfatsion (2006), Agent-Based Computational Economics: A Constructive Approach to Economic Theory
(preprint,pdf,399KB),
Introductory Chapter (pp. 831-880) in Leigh Tesfatsion and Kenneth L. Judd (eds.),
Handbook of Computational Economics 2: Agent-Based
Computational Economics
(Contributors and Contents),
Handbooks in Economics Series, North-Holland (Elsevier), Amsterdam, the Netherlands.
- Leigh Tesfatsion (2002), "Economic Agents and Markets as Emergent Phenomena"
(preprint,pdf,167KB),
Proceedings of the National Academy of Sciences U.S.A., Vol. 99, Supp. 3, 7191-7192.
- Leigh Tesfatsion (2001), "Structure, Behavior, and Market Power in an Evolutionary Labor Market with Adaptive Search"
(pdf,295KB),
Journal of Economic Dynamics and Control, Vol. 25, Nos. 3-4, 419-457.
- Mark Pingle and Leigh Tesfatsion (1998), "Active Intermediation in a Monetary Overlapping Generations Economy"
(pdf,225KB),
Journal of Economic Dynamics and Control, Vol. 22, 1533-1574.
- Leigh Tesfatsion (1997), "A Trade Network Game with Endogenous Partner Selection"
(pdf,401KB),
pages 249-269 in H. M. Amman, B. Rustem, and A. B. Whinston
(eds.), Computational Approaches to Economic Problems, Kluwer Academic Publishers.
- Robert E. Kalaba and Leigh Tesfatsion (1996), "A Multicriteria Approach to Model Specification and Estimation"
(pdf,1.6MB),
Computational Statistics and Data Analysis, Vol. 21, 193-214 (lead article).
- Robert E. Kalaba and Leigh Tesfatsion (1990), "Flexible Least Squares for Approximately Linear Systems"
(pdf,1.2MB),
IEEE Transactions on Systems, Man, and Cybernetics,
Vol. 20, No. 5, 978-989.
- Robert E. Kalaba and Leigh Tesfatsion (1990), "Nonlocal Automated Sensitivity Analysis"
(pdf,1MB),
Computers and Mathematics with Applications, Vol. 20, No. 2, 53-65.
- Robert E. Kalaba and Leigh Tesfatsion (1981), "An Exact Sequential Solution Procedure for a Class of Discrete-Time Nonlinear Estimation Problems"
(pdf,581KB),
IEEE Transactions on Automatic Control, Vol. AC-26, 1133-1149.
-
Leigh Tesfatsion (1979), "Direct Updating of Intertemporal Criterion Functions for a Class of Adaptive Control Problems"
(pdf,2MB),
IEEE Transactions on Systems, Man, and Cybernetics, Vol. SMC-9, 143-151.
