Thesis research at University of Minnesota (19741975) on Games, Goals, and Bounded Rationality

The key idea of the followings thesis is that boundedlyrational decisionmakers 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 goaldirected 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, 7615,007 University of Minnesota, Mpls., December.
Work at University of Minnesota (19741975) and USC (19751984) on Criterion Filtering

The following question arises for sequential decisionmaking 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 (19751990) on Flexible Least Squares
 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 goodnessoffit metrics. FLS does not require the adhoc 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 (19751990) 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 19751990 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 illconditioned due to nearby singularities or bifurcation points. This adaptive capability is achieved by replacing the standard homotopy continuation parameter, moving in a preset 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 multicriteria optimization problem requiring a tradeoff between two criteria: (i) maintain a short path length from 0+0i to 1+0i; and (ii) avoid regions in the complex plane where illconditioning of calculations is detected.

Adaptive Computation Methods for Nonlinear Systems
Work at USC (19751990) and ISU (1990present) on
Modeling of Economies as OpenEnded 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 Dynamic,
Stochastic, and General marketbased macroeconomic systems for which decisionmaking agents have Learning capabilities. Coordination arises endogenously (if at all) in DSGL systems as a result of successive agent interactions, not from the external imposition of equilibrium assumptions.

Optimality and Efficiency of
OpenEnded Dynamic Economies
Work at ISU (19902001) 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 starttime for each successive trading period, each trader directs trade offers to preferred trade partners and preferentially accepts or refuses trade offers received from other traders,
based on his current state (data,attributes,methods). Matched traders then participate in a trade process modeled as a twoplayer game, where each trade partner uses a trade strategy selected to maximize his expected net gain conditional on his current state. At the completion of these trade processes, each trader adaptively updates his current state based on trade outcomes he has experienced or observed during this latest trading period.

The Trade Network Game (TNG) Laboratory is opensource demonstration software permitting the beautiful runtime visualization of endogenous tradenetwork formation among strategic buyers, sellers, and dealers in a sequential trade network game.

Endogenous Trade Network Formation
and the TNG Laboratory
Work at ISU (1990present)
on Completely AgentBased Modeling (cABM) and
Agentbased Computational Economics (ACE)

Scientists and engineers seek to understand how realworld systems work, and how realworld 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 AgentBased Modeling (cABM) and Agentbased Computational Economics (ACE) for sciencewithpractice research. cABM
is a variant of agentbased 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 cABM to economic systems.

Completely AgentBased Modeling (cABM)

AgentBased Computational
Economics (ACE): Homepage
Work at ISU (1998present) on Design and Performance of
U.S. RTO/ISOManaged Wholesale Power Markets

Power supplies and demands in gridsupported U.S. RTO/ISOmanaged wholesale power markets are becoming increasingly volatile and uncertain due to: (i) increasing reliance on weatherdependent 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 GridSupported 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. 202301175051), U.S. Federal Energy Regulatory Commission (FERC) Docket AD2110000 ("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/ISOmanaged wholesale power markets.
Work at ISU (2006present) 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 (FERC) in September 2020  encourages increased participation in U.S. RTO/ISOmanaged wholesale power markets by locallymanaged aggregations of distributionlevel customers.
Transactive Energy System (TES) design, pioneered by researchers at the Pacific
Northwest National Laboratory
(PNNL), 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 agentbased computational platforms capturing salient features of actual U.S. ITD systems.

Integrated Transmission and Distribution (ITD)
Project: ISU Homepage
Work at ISU (2011present) on a Linked SwingContract Market Design for U.S. RTO/ISOManaged Wholesale Power Markets

The Linked SwingContract Market Design includes three innovative features to facilite the efficient and reliable operation of U.S. RTO/ISOmanaged wholesale power markets as they transition to decarbonized grid operations with increasingly diverse participants.

The first innovative feature is a fundamental change in the current conceptuallyproblematic focus on griddelivered energy (MWh) as the basic transacted product. Under the Linked SwingContract Market Design, the basic transacted product is conceived to be a powerpath, 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 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 shorttolong focus of the RTO/ISO on sequential dayahead and intraday market scheduling of griddelivered energy supplies to balance forecasted energy demands, supported by operating reserve (unencumbered generation capacity) and supplemental unit commitment processes.
In sharp contrast, under the Linked SwingContract Market Design the envisioned primary role of the RTO/ISO consists of a
longtoshort focus on advance procurement of reserve (dispatchable powerpath production capabilities) in linked RTO/ISOmanaged forward markets M(T) for future operating periods T as insurance against volumetric grid risk. The RTO/ISOspecified lookahead horizon LAH(T) between the close of M(T) and the start of T can range in duration from years to seconds, as can the duration of T itself.

The third innovative feature is the twopart pricing swingcontract form of the reserve offers that dispatchable power resources can submit into each RTO/ISOmanaged forward market M(T) for a future operating period T. The "swing" (flexibility) in these reserve offers facilitates flexible reserve availability, enabling efficient RTO/ISO dispatch of justintime powerpath deliveries to meet justintime customer power usage and grid reliability requirements. The twopart pricing feature of these reserve offers permits dispatchable power resources to ensure their revenue sufficiency.

Leigh Tesfatsion (2021), A New SwingContract 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 (2023present) on ManytoOne Economic and Physical Measurement Issues for U.S. RTO/ISOManaged Wholesale Power Markets

Locational Marginal Pricing (LMP) settlements for griddelivered energy in U.S. RTO/ISOmanaged wholesale power markets are conceptually problematic due to a fundamental manytoone measurement problem for benefit/cost valuations.

LMP settlements assign unique perunit prices
LMP(b,T) ($/MWh) to amounts E(b,T) (MWh) of griddelivered energy, conditional on grid delivery location b and delivery period T. The conceptuallycoherent derivation of these perunit prices depends on an assumed unit homogeneity property: namely, given E(b,T), each trader must consider all possible "next" units (MWh) of griddelivered 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 griddelivered energy at b during T, given E(b,T), will typically depend strongly on the dynamic properties of the powerpath used to implement the delivery of this "next" unit  for example, the powerpath's ramprate profile at b during T. Thus, any attempt to determine a single perunit price LMP(b,T) ($/MWh) for a griddelivered energy amount E(b,T) (MWh) at b during T could entail serious mismeasurement of the true benefit/cost valuations of market participants and system operators.

Recently, 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 concluded that important physical operational issues for electric power networks can be traced back to fundamental manytoone measurement problems associated with these definitions. Briefly stated, these definitions  expressed in static RootMeanSquare (RMS) timeaveraged form for an electric power network during a conventionally designated timeinterval 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/ISOmanaged wholesale power markets is to assign measured economic benefit/cost valuations to measured physical powerpath deliveries in a manner that ensures grid operations are both economically efficient and physically reliable. Consequently, in such contexts, manytoone measurement problems for economic benefit/cost valuations are essentially conjoined with manytoone measurement problems for physical power concepts.

Implications of these two conjoined manytoone measurement problems for the design and operation of U.S. RTO/ISOmanaged wholesale power markets are currently under study. See, for example, the following working paper:

Leigh Tesfatsion (2023), "Locational Marginal Pricing: When and Why Not?"
(WP,pdf),
Economics Working Paper No. 23003, ISU Digital Repository, Iowa State University, Ames, Iowa, 13pp.
Selected Publications and Reports

Leigh Tesfatsion (2023), "Locational Marginal Pricing: When and Why Not?"
(WP,pdf),
Economics Working Paper No. 23003, ISU Digital Repository, Iowa State University, Ames, Iowa, 13pp.

Leigh Tesfatsion (2023), "Economics of GridSupported 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. 202301175051), U.S. Federal Energy Regulatory Commission (FERC) Docket AD2110000 ("Modernizing Wholesale Electric Power Market Design"), January.

Leigh Tesfatsion (2023), "AgentBased Computational Economics: Overview and Brief History"
(Preprint,pdf,170KB),
(SSCKeynote,pdf,1.5MB),
Chapter 4 (pp. 4158) 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 SwingContract 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 CustomerCentric Approach to BidBased Transactive Energy System Design"
(IEEEPreprint,pdf,1.2MB),
(SlideSet,pdf,3.8MB),
IEEE Transactions on Smart Grid 11(6), 49965008.
DOI: 10.1109/TSG.2020.3008611

Leigh Tesfatsion (2018), "Electric Power Markets in Transition: AgentBased Modeling Tools for Transactive Energy Support"
(Preprint,pdf,3.6MB),
Chapter 13 (pp. 715766) 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
LocallyConstructive Sequential Games"
(WP,pdf,605KB),
(SlideSet,pdf,1MB),
Journal of Economic Methodology, Vol. 24, Issue 4, 384409.

Leigh Tesfatsion, Chris R. Rehmann, Diego S. Cardoso, Yu Jie, and William J. Gutowski (2017), "An AgentBased Platform for the Study of Watersheds as Coupled Natural and Human Systems"
(WP,pdf,1.2M),
Environmental Modelling & Software, Vol. 89, March,
4060.
 Ekaterina Sinitskaya and Leigh Tesfatsion (2015), "Macroeconomies as Constructively Rational Games"
(WP,pdf,1.3MB),
Journal of Economic Dynamics and Control, Vol. 61, December, 152182.

Paul Borrill and Leigh Tesfatsion (2011), "AgentBased Modeling: The Right Mathematics for the Social Sciences?"
(WP,pdf,3.5MB),
pages 228258 in J.B. Davis and D.W. Hands (eds.), Elgar Companion to Recent Economic Methodology, Edward Elgar Publishers, 560pp. ISBN13: 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, 627641.
 Blake LeBaron and Leigh Tesfatsion (2008), "Modeling Macroeconomies as OpenEnded Dynamic Systems of Interacting Agents"
(preprint,pdf,45KB),
American Economic Review (Papers & Proceedings), Vol. 98, No. 2, 246250.
 Leigh Tesfatsion (2006), AgentBased Computational Economics: A Constructive Approach to Economic Theory
(preprint,pdf,399KB),
Introductory Chapter (pp. 831880) in Leigh Tesfatsion and Kenneth L. Judd (eds.),
Handbook of Computational Economics 2: AgentBased
Computational Economics
(Contributors and Contents),
Handbooks in Economics Series, NorthHolland (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, 71917192.
 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. 34, 419457.
 Mark Pingle and Leigh Tesfatsion (1998), "Active Intermediation in a Monetary Overlapping Generations Economy"
(pdf,225KB),
Journal of Economic Dynamics and Control, Vol. 22, 15331574.
 Leigh Tesfatsion (1997), "A Trade Network Game with Endogenous Partner Selection"
(pdf,401KB),
pages 249269 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, 193214 (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, 978989.
 Robert E. Kalaba and Leigh Tesfatsion (1990), "Nonlocal Automated Sensitivity Analysis"
(pdf,1MB),
Computers and Mathematics with Applications, Vol. 20, No. 2, 5365.
 Robert E. Kalaba and Leigh Tesfatsion (1981), "An Exact Sequential Solution Procedure for a Class of DiscreteTime Nonlinear Estimation Problems"
(pdf,581KB),
IEEE Transactions on Automatic Control, Vol. AC26, 11331149.

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. SMC9, 143151.