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
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
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.
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

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

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

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)

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

ABM for banking strategy within a
turbulent environment
According to their
strategies they adopt
in the strategy space
Have a set of
requirements that
determine his position
in the strategy space
Figure 1 Location of banks (B) and customers (C) in the strategy hypercube
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)
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<S* (inertia)
customer switch, if S≥S* (look for closest)
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.
Parameterisation of the Model


Turbulence:
Customers are either
(i) stay still (non-turbulent)
(ii) random walk (turbulent)
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

Results II
Strategy: Follow the Leader (an emergent
strategy)
 The efficacy of such strategy depends on
s*

Hardly switch
(very loyal)
Very rational
Results III
Strategy: Customer-Centric (an emergent
strategy)
 This strategy works better in a turbulent
market

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
