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Agent-based computational economics (ACE) is the area of
computational economics Computational economics is an interdisciplinary research discipline that combines methods in computational science and economics to solve complex economic problems.''Computational Economics''."About This Journal"an"Aims and Scope" This subject e ...
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 ...
, 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, such as in a parametric curve. Examples include the mathematical models that describe the swinging of a clock ...
s of interacting agents. As such, it falls in the
paradigm In science and philosophy, a paradigm ( ) is a distinct set of concepts or thought patterns, including theories, research methods, postulates, and standards for what constitute legitimate contributions to a field. The word ''paradigm'' is Ancient ...
of
complex adaptive system A complex adaptive system (CAS) 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 ...
s. In corresponding
agent-based model An agent-based model (ABM) is a computational model for simulating the actions and interactions of autonomous agents (both individual or collective entities such as organizations or groups) in order to understand the behavior of a system and ...
s, 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 and other reinforcement learning techniques). As part of
non-equilibrium economics Non-equilibrium economics or out-of-equilibrium economics is a branch of economic theory that examines the behavior of economic agents and Market (economics), markets in situations where traditional approaches of economic equilibrium do not hold. ...
, the theoretical assumption of
mathematical optimization Mathematical optimization (alternatively spelled ''optimisation'') or mathematical programming is the selection of a best element, with regard to some criteria, from some set of available alternatives. It is generally divided into two subfiel ...
by agents in equilibrium is replaced by the less restrictive postulate of agents with
bounded rationality Bounded rationality is the idea that rationality is limited when individuals decision-making, make decisions, and under these limitations, rational individuals will select a decision that is satisficing, satisfactory rather than optimal. Limitat ...
''adapting'' to market forces. ACE models apply
numerical methods Numerical analysis is the study of algorithms that use numerical approximation (as opposed to symbolic manipulations) for the problems of mathematical analysis (as distinguished from discrete mathematics). It is the study of numerical methods t ...
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 an economy. It includes the combination of the various institutions, agencies, entities, decision-making proces ...
. ACE has a similarity to, and overlap with,
game theory Game theory is the study of mathematical models of strategic interactions. It has applications in many fields of social science, and is used extensively in economics, logic, systems science and computer science. Initially, game theory addressed ...
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 Alvin Eliot Roth (born December 18, 1951) is an American academic. He is the Craig and Susan McCaw professor of economics at Stanford University and the George Gund (philanthropist), Gund professor of economics and business administration emeri ...
(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, information, and automation. Computer science spans Theoretical computer science, theoretical disciplines (such as algorithms, theory of computation, and information theory) to Applied 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 In financial economics, asset pricing refers to a formal treatment and development of two interrelated Price, pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, ...
,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. energy systems,
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, indi ...
and
collaboration Collaboration (from Latin ''com-'' "with" + ''laborare'' "to labor", "to work") is the process of two or more people, entities or organizations working together to complete a task or achieve a goal. Collaboration is similar to cooperation. The ...
,
transaction cost In economics, a transaction cost is a cost incurred when making an economic trade when participating in a market. The idea that transactions form the basis of economic thinking was introduced by the institutional economist John R. Commons in 1 ...
s,
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 i ...
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 per ...
and dynamics,
welfare economics Welfare economics is a field of economics that applies microeconomic techniques to evaluate the overall well-being (welfare) of a society. The principles of welfare economics are often used to inform public economics, which focuses on the ...
, and
mechanism design Mechanism design (sometimes implementation theory or institution design) is a branch of economics and game theory. It studies how to construct rules—called Game form, mechanisms or institutions—that produce good outcomes according to Social ...
, information and uncertainty,
macroeconomics Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output (econ ...
, and
Marxist economics Marxian economics, or the Marxian school of economics, is a Heterodox economics, heterodox school of political economic thought. Its foundations can be traced back to Karl Marx, Karl Marx's Critique of political economy#Marx's critique of politi ...
.


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 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, inc ...
have contributed to the development of ACE.


Agent-based 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 Bank run#Systemic banki ...
. See also discussion under and § Departures from rationality.


Agent-based macroeconomics

Agent-Based Macroeconomics (ABM) builds understanding of the economy from the very bottom up. Instead of broad averages, ABM explicitly simulates many diverse, heterogeneous agents. Each agent operates with specific rules for behavior and learning. They also form expectations in unique ways. This "bottom-up" philosophy traces back to Herbert Simon's early work. Economic events emerge organically from the agents' interactions. They are not simply caused by external shocks. ABM incorporates empirically-informed behavioral rules. It also represents persistent heterogeneity among agents. Explicit institutional structures and market frictions are included too.


See also

* Agent-based social simulation * Artificial financial market *
Computational economics Computational economics is an interdisciplinary research discipline that combines methods in computational science and economics to solve complex economic problems.''Computational Economics''."About This Journal"an"Aims and Scope" This subject e ...
* Econophysics *
Macroeconomic model A macroeconomic model is an analytical tool designed to describe the operation of the problems of economy of a country or a region. These models are usually designed to examine the comparative statics and dynamics of aggregate quantities such a ...
* Multi-agent system * Statistical finance


References

{{Economics Computational economics Monte Carlo methods in finance Computational fields of study Agent-based model