Agent-based computational economics (ACE) is the area of

computational economics Computational Economics is an interdisciplinary research discipline that involves computer science, economics, and management science.''Computational Economics''."About This Journal"an"Aims and Scope" This subject encompasses computational model ...

that studies economic processes, including whole

economies An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...

, as

dynamic system In mathematics, a dynamical system is a system in which a function describes the time dependence of a point in an ambient space. Examples include the mathematical models that describe the swinging of a clock pendulum, the flow of water in a ...

s of interacting agents. As such, it falls in the paradigm of

complex adaptive system A complex adaptive system is a system that is '' complex'' in that it is a dynamic network of interactions, but the behavior of the ensemble may not be predictable according to the behavior of the components. It is '' adaptive'' in that the indiv ...

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 model behavior and social interactions based on incentives and information. Such rules could also be the result of optimization, realized through use of AI methods (such as

Q-learning ''Q''-learning is a model-free reinforcement learning algorithm to learn the value of an action in a particular state. It does not require a model of the environment (hence "model-free"), and it can handle problems with stochastic transitions an ...

and other reinforcement learning techniques). The theoretical assumption of mathematical optimization by agents in equilibrium is replaced by the less restrictive postulate of agents with bounded rationality ''adapting'' to market forces. ACE models apply numerical methods of analysis to computer-based simulations of complex dynamic problems for which more conventional methods, such as theorem formulation, may not find ready use. Starting from initial conditions specified by the modeler, the computational economy evolves over time as its constituent agents repeatedly interact with each other, including learning from interactions. In these respects, ACE has been characterized as a bottom-up culture-dish approach to the study of

economic systems An economic system, or economic order, is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, agencies, entitie ...

. ACE has a similarity to, and overlap with, game theory as an agent-based method for modeling social interactions.• Joseph Y. Halpern (2008). "computer science and game theory," ''The New Palgrave Dictionary of Economics'', 2nd Edition.
Abstract

• Yoav Shoham (2008). "Computer Science and Game Theory," ''Communications of the ACM'', 51(8), pp
75-79
.
• Alvin E. Roth (2002). "The Economist as Engineer: Game Theory, Experimentation, and Computation as Tools for Design Economics," ''Econometrica'', 70(4), pp
1341–1378
But practitioners have also noted differences from standard methods, for example in ACE events modeled being driven solely by initial conditions, whether or not equilibria exist or are computationally tractable, and in the modeling facilitation of agent autonomy and learning. The method has benefited from continuing improvements in modeling techniques of

computer science Computer science is the study of computation, automation, and information. Computer science spans theoretical disciplines (such as algorithms, theory of computation, information theory, and automation) to practical disciplines (includi ...

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,B. Arthur, J. Holland, B. LeBaron, R. Palmer, P. Taylor (1997), 'Asset pricing under endogenous expectations in an artificial stock market,' in ''The Economy as an Evolving Complex System II'', B. Arthur, S. Durlauf, and D. Lane, eds., Addison Wesley.

competition Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indiv ...

and collaboration,

transaction cost In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike pro ...

market structure Market structure, in economics, depicts how firms are differentiated and categorised based on the types of goods they sell (homogeneous/heterogeneous) and how their operations are affected by external factors and elements. Market structure makes it ...

and

industrial organization In economics, industrial organization is a field that builds on the theory of the firm by examining the structure of (and, therefore, the boundaries between) firms and markets. Industrial organization adds real-world complications to the perf ...

and dynamics,

welfare economics Welfare economics is a branch of economics that uses microeconomic techniques to evaluate well-being (welfare) at the aggregate (economy-wide) level. Attempting to apply the principles of welfare economics gives rise to the field of public ec ...

, and

mechanism design Mechanism design is a field in economics and game theory that takes an objectives-first approach to designing economic mechanisms or incentives, toward desired objectives, in strategic settings, where players act rationally. Because it starts a ...

, information and uncertainty, macroeconomics, and

Marxist economics Marxian economics, or the Marxian school of economics, is a heterodox school of political economic thought. Its foundations can be traced back to Karl Marx's critique of political economy. However, unlike critics of political economy, Marxian ec ...

Overview

The " agents" 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 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 expe ...

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 The Santa Fe Institute (SFI) is an independent, nonprofit theoretical research institute located in Santa Fe, New Mexico, United States and dedicated to the multidisciplinary study of the fundamental principles of complex adaptive systems, inclu ...

have contributed to the development of ACE.

Example: finance

One area where ACE methodology has frequently been applied is asset pricing. W. Brian Arthur, 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 2008

financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...

.M. Holcombe, S. Coakley, M.Kiran, S. Chin, C. Greenough, D.Worth, S.Cincotti, M.Raberto, A. Teglio, C. Deissenberg, S. van der Hoog, H. Dawid, S. Gemkow, P. Harting, M. Neugart. Large-scale Modeling of Economic Systems, Complex Systems, 22(2), 175-191, 2013

References

{{Reflist Computational economics Monte Carlo methods in finance Computational fields of study

Overview

Example: finance

See also

References