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 mod ...
that studies economic processes, including whole
economies, as
dynamic systems 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 indi ...
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 what ...
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
''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 a ...
and other reinforcement learning techniques).
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 criterion, from some set of available alternatives. It is generally divided into two subfi ...
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 make decisions, and under these limitations, rational individuals will select a decision that is satisfactory rather than optimal.
Limitations include the difficulty of ...
''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 th ...
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 (includin ...
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 main pricing principles, outlined below, together with the resultant models.
There have been many models developed for different situations, but correspon ...
,
[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, ind ...
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. Most ...
,
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 ...
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 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 perfe ...
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 econ ...
, 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.
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]
See also
* ACEGES
The ACEGES model (Agent-based Computational Economics of the Global Energy System) 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-pur ...
* Agent-based social simulation
* Artificial economics Artificial Economics can be defined as ″''a research field that aims at improving our understanding of socioeconomic processes with the help of computer simulation''″.Izquierdo, L. R., & Izquierdo, S. S. (2015). Artificial Economics: What, Why ...
* 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 mod ...
* 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
A multi-agent system (MAS or "self-organized system") is a computerized system composed of multiple interacting intelligent agents.Hu, J.; Bhowmick, P.; Jang, I.; Arvin, F.; Lanzon, A.,A Decentralized Cluster Formation Containment Framework fo ...
* Statistical finance
References
{{Reflist
Computational economics
Monte Carlo methods in finance
Computational fields of study