Agent-Based Computational Economics
Encyclopedia
Agent-based computational economics (ACE) is the major aspect of computational economics
that studies economic processes, including whole economies
, as dynamic systems of interacting agents
. As such, it falls in paradigm
of complex adaptive system
s. In corresponding agent-based models, the "agents
" are "computational objects modeled as interacting according to rules" over space and time, not real people. The rules are formulated to predict behavior and social interactions based on incentives and information. The theoretical assumption of mathematical optimization by agents is replaced by the less restrictive postulate of agents adapting to market forces. Starting from initial conditions specified by the modeler, the computational economy evolves over time as its constituent agents repeatedly interact with each other and learn from their interactions. In these respects, ACE has been characterized as a bottom-up culture-dish approach to the study of economic systems.
The method has benefited from continuing improvements in modeling techniques of computer science
and increased computer capabilities. The ultimate scientific objective of the method is to "test theoretical findings against real-world data in ways that permit empirically supported theories to cumulate over time, with each researcher’s work building appropriately on the work that has gone before." The subject has been applied to research areas like asset pricing, industry dynamics, macroeconomics
, and Marxist economics.
" in ACE models can represent individuals (e.g. people), social groupings (e.g. firms), biological entities (e.g. growing crops), and/or physical systems (e.g. transport systems). The ACE modeler provides the initial configuration of a computational economic system comprising multiple interacting agents. The modeler then steps back to observe the development of the system over time without further intervention. In particular, system events should be driven by agent interactions without external imposition of equilibrium conditions. Issues include those common to experimental economics
in general and development of a common framework for empirical validation and resolving open questions in agent-based modeling.
ACE is an officially designated special interest group (SIG) of the Society for Computational Economics. Researchers at the Santa Fe Institute
have contributed to the development of ACE.
, Eric Baum
, William Brock
, Cars Hommes, and Blake LeBaron, among others, have developed computational models in which many agents choose from a set of possible forecasting strategies in order to predict stock prices, which affects their asset demands and thus affects stock prices. These models assume that agents are more likely to choose forecasting strategies which have recently been successful. The success of any strategy will depend on market conditions and also on the set of strategies that are currently being used. These models frequently find that large booms and busts in asset prices may occur as agents switch across forecasting strategies. More recently, Brock, Hommes, and Wagener (2009) have used a model of this type to argue that the introduction of new hedging instruments may destabilize the market, and some papers have suggested that ACE might be a useful methodology for understanding the recent financial crisis
.
Computational economics
Computational economics is a research discipline at the interface between computer science and economic and management science. Areas encompassed include agent-based computational modeling, computational modeling of dynamic macroeconomic systems and transaction costs, other applications in...
that studies economic processes, including whole economies
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
, as dynamic systems of interacting agents
Agent (economics)
In economics, an agent is an actor and decision maker in a model. Typically, every agent makes decisions by solving a well or ill defined optimization/choice problem. The term agent can also be seen as equivalent to player in game theory....
. As such, it falls in paradigm
Paradigm
The word paradigm has been used in science to describe distinct concepts. It comes from Greek "παράδειγμα" , "pattern, example, sample" from the verb "παραδείκνυμι" , "exhibit, represent, expose" and that from "παρά" , "beside, beyond" + "δείκνυμι" , "to show, to point out".The original Greek...
of complex adaptive system
Complex adaptive system
Complex adaptive systems are special cases of complex systems. They are complex in that they are dynamic networks of interactions and relationships not aggregations of static entities...
s. In corresponding agent-based models, the "agents
Agent (economics)
In economics, an agent is an actor and decision maker in a model. Typically, every agent makes decisions by solving a well or ill defined optimization/choice problem. The term agent can also be seen as equivalent to player in game theory....
" are "computational objects modeled as interacting according to rules" over space and time, not real people. The rules are formulated to predict behavior and social interactions based on incentives and information. The theoretical assumption of mathematical optimization by agents is replaced by the less restrictive postulate of agents adapting to market forces. Starting from initial conditions specified by the modeler, the computational economy evolves over time as its constituent agents repeatedly interact with each other and learn from their interactions. In these respects, ACE has been characterized as a bottom-up culture-dish approach to the study of economic systems.
The method has benefited from continuing improvements in modeling techniques of computer science
Computer science
Computer science or computing science is the study of the theoretical foundations of information and computation and of practical techniques for their implementation and application in computer systems...
and increased computer capabilities. The ultimate scientific objective of the method is to "test theoretical findings against real-world data in ways that permit empirically supported theories to cumulate over time, with each researcher’s work building appropriately on the work that has gone before." The subject has been applied to research areas like asset pricing, industry dynamics, macroeconomics
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
, and Marxist economics.
Overview
The "agentsAgent (economics)
In economics, an agent is an actor and decision maker in a model. Typically, every agent makes decisions by solving a well or ill defined optimization/choice problem. The term agent can also be seen as equivalent to player in game theory....
" in ACE models can represent individuals (e.g. people), social groupings (e.g. firms), biological entities (e.g. growing crops), and/or physical systems (e.g. transport systems). The ACE modeler provides the initial configuration of a computational economic system comprising multiple interacting agents. The modeler then steps back to observe the development of the system over time without further intervention. In particular, system events should be driven by agent interactions without external imposition of equilibrium conditions. Issues include those common to experimental economics
Experimental economics
Experimental economics is the application of experimental methods to study economic questions. Data collected in experiments are used to estimate effect size, test the validity of economic theories, and illuminate market mechanisms. Economic experiments usually use cash to motivate subjects, in...
in general and development of a common framework for empirical validation and resolving open questions in agent-based modeling.
ACE is an officially designated special interest group (SIG) of the Society for Computational Economics. Researchers at the Santa Fe Institute
Santa Fe Institute
The Santa Fe Institute is an independent, nonprofit theoretical research institute located in Santa Fe and dedicated to the multidisciplinary study of the fundamental principles of complex adaptive systems, including physical, computational, biological, and social systems.The Institute houses a...
have contributed to the development of ACE.
Example: finance
One area where ACE methodology has frequently been applied is asset pricing. W. Brian ArthurW. Brian Arthur
William Brian Arthur is an economist credited with influencing and describing the modern theory of increasing returns. He has lived and worked in Northern California for many years. He is an authority on economics in relation to complexity theory, technology and financial markets...
, Eric Baum
Eric Baum
Eric B. Baum is an American computer scientist, artificial intelligence researcher and author. He is known for his materialist and evolutionist theories of intelligence and consciousness, set forth in his 2004 book What is Thought? ....
, William Brock
William A. Brock (economist)
William Allen "Buz" Brock is a mathematical economist, a professor at the University of Wisconsin–Madison, since 1975. He is known for his application of a branch of mathematics known as chaos theory to economic theory and econometrics. In 1998, he was elected to the National Academy of Sciences ...
, Cars Hommes, and Blake LeBaron, among others, have developed computational models in which many agents choose from a set of possible forecasting strategies in order to predict stock prices, which affects their asset demands and thus affects stock prices. These models assume that agents are more likely to choose forecasting strategies which have recently been successful. The success of any strategy will depend on market conditions and also on the set of strategies that are currently being used. These models frequently find that large booms and busts in asset prices may occur as agents switch across forecasting strategies. More recently, Brock, Hommes, and Wagener (2009) have used a model of this type to argue that the introduction of new hedging instruments may destabilize the market, and some papers have suggested that ACE might be a useful methodology for understanding the recent financial crisis
Financial crisis
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...
.
See also
- Computational economicsComputational economicsComputational economics is a research discipline at the interface between computer science and economic and management science. Areas encompassed include agent-based computational modeling, computational modeling of dynamic macroeconomic systems and transaction costs, other applications in...
- EconophysicsEconophysicsEconophysics is an interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic processes and nonlinear dynamics...
- Statistical financeStatistical financeStatistical finance, sometimes called econophysics, is an empirical attempt to shift finance from its normative roots to a positivist framework using exemplars from statistical physics with an emphasis on emergent or collective properties of financial markets...
- Multi-agent systemMulti-agent systemA multi-agent system is a system composed of multiple interacting intelligent agents. Multi-agent systems can be used to solve problems that are difficult or impossible for an individual agent or a monolithic system to solve...
- Macroeconomic model
- ACEGESACEGESThe ACEGES is a decision-support tool for energy policy by means of controlled computational experiments. The ACEGES tool is designed to be the foundation for large custom-purpose simulations of the global energy system...
Further reading
- John Duffy (2006), 'Agent-based models and human subject experiments.' Ch. 19 of L. Tesfatsion and K.L. Judd, eds., Handbook of Computational Economics, Vol. 2 (Amsterdam: Elsevier, 2006), pp. 949–1011.
- Sheri MarkoseSheri MarkoseSheri Markose is a professor in economics at the University of Essex, where she holds a personal chair since 2006, and is the founding director of the Centre for Computational Finance and Economic Agents at Essex...
, Jasmina Arifovic, and Shyam Sunder (2007), 'Advances in experimental and agent-based modelling: Asset markets, economic networks, computational mechanism design, and evolutionary game dynamics.' Journal of Economic Dynamics and ControlJournal of Economic Dynamics and ControlThe Journal of Economic Dynamics and Control is a peer-reviewed scholarly journal devoted to computational economics, dynamic economic models, and macroeconomics. It is edited at the University of Amsterdam and published by Elsevier...
31, pp. 1801–07. - Shoham, Yoav, and Kevin Leyton-Brown, "Multiagent Systems: Algorithmic, Game-Theoretic, and Logical Foundations". Cambridge University Press, 2009.
External links
- Agent Based Computational Economics - Leigh Tesfatsion's website on ACE at Iowa State University
- JAMEL (a Java Agent-based MacroEconomic Laboratory) - An on-line, interactive agent-based macroeconomic model
- The Use of Agent-Based Models in Regional Science - a study on agent-based models to simulate urban agglomeration
- ACEGES - An on-line, interactive agent-based model of the global energy system
- JCAT - A scalable and versatile experimental platform for ACE; used as the Server and Agentware for the Trading Agent Competition on Market Design (also known as the CAT Game)