2 - Agent-Based Computational Economics: What, Why, When

Summary

Introduction

What are agent-based (AB) models? In a nutshell, they are models (i.e., abstract representations of the reality) in which (i) a multitude of objects interact with each other and with the environment, (ii) the objects are autonomous (i.e., there is no central, or “top-down,” control over their behavior and, more generally, on the dynamics of the system), and (iii) the outcome of their interaction is numerically computed. Since the objects are autonomous, they are called agents. The application of agent-based modeling to economics is called Agent-Based Computational Economics (ACE). As Leigh Tesfatsion – one of the leading researchers in the field and the “mother” of the ACE acronym – defines it, ACE is

the computational study of economic processes modeled as dynamic systems of interacting agents (Tesfatsion, 2006).

In other terms, AB models are the tool traditionally employed by ACE researchers to study economies as complex evolving systems, that is systems composed by many interacting units evolving through time.

None of the features above, in isolation, define the methodology: the microperspective implied by (i) and (ii) is roughly the same as the one adopted, for instance, by game theory, where strategic interaction is investigated analytically (though in game theory the number of individuals who populate the models is generally very small). The computational approach, instead, is typical of Computational General Equilibrium or Stock-Flow Consistent models, which are, however, based on aggregate representations of the system.

In this introductory chapter we describe the features of AB models (Section 2.2), offering an overview of their historical development (Section 2.3), discussing when they can be fruitfully employed and how they can be combined with more traditional approaches (Section 2.4). As an example, we describe one of the first and most prominent AB models, Thomas Schelling's Segregation model (Section 2.5). Conclusions follow.

Features of Agent-Based Models

The basic units of AB models are the “agents.” In economics, agents can be anything from individuals to social groups – like families or firms. They may also be more complicated organizations (banks for instance), or even industries or countries. Agents can be composed by other agents: the only requirement being that they are perceived as a unit from the outside, and that they do something – that is they have the ability to act – and possibly react to external stimuli and interact with the environment and with other agents.