Book contents
- Frontmatter
- Contents
- Preface
- 1 Overviews
- 2 Setting Up Dynamic Models
- 3 The Master Equation
- 4 Introductory Simple and Simplified Models
- 5 Aggregate Dynamics and Fluctuations of Simple Models
- 6 Evaluating Alternatives
- 7 Solving Nonstationary Master Equations
- 8 Growth and Fluctuations
- 9 A New Look at the Diamond Search Model
- 10 Interaction Patterns and Cluster Size Distributions
- 11 Share Market with Two Dominant Groups of Traders
- Appendix
- References
- Index
6 - Evaluating Alternatives
Published online by Cambridge University Press: 15 October 2009
- Frontmatter
- Contents
- Preface
- 1 Overviews
- 2 Setting Up Dynamic Models
- 3 The Master Equation
- 4 Introductory Simple and Simplified Models
- 5 Aggregate Dynamics and Fluctuations of Simple Models
- 6 Evaluating Alternatives
- 7 Solving Nonstationary Master Equations
- 8 Growth and Fluctuations
- 9 A New Look at the Diamond Search Model
- 10 Interaction Patterns and Cluster Size Distributions
- 11 Share Market with Two Dominant Groups of Traders
- Appendix
- References
- Index
Summary
How do economic agents assess the relative merits of alternative choices? There are many questions to be resolved in choosing alternatives, such as the length of planning horizons, the degrees of precisions with which the factors or variables are known or estimated, and the degree to which agents are able to allow for externalities caused by other agents' decisions. In this chapter, for simplicity, we examine this question by assuming that agents all face the same choice set, although that is not necessary.
To partially answer this important question, we assume that economic agents calculate or estimate present values of the consequences of their alternative choices, and choose the ones with the largest present value. Agents do this by calculating the discounted present values of alternative streams of profits, utilities, or whatever other “things” contribute to their benefits. Agents' decision-making problems are complex, partly because alternative streams of revenues, utilities, and the likes are only incompletely and imperfectly known or estimated. Their future choice sets may also be altered by past positions or by choices they or others have made. They may also be unaware of aggregate effects of choices made by others. Agents usually are not able to allow for the externalities completely. The utility or cost of individual decisions is often affected by these aggregate effects.
Actually, such calculations of present values are by no means straightforward, being affected at least by the same set of difficulties.
- Type
- Chapter
- Information
- Modeling Aggregate Behavior and Fluctuations in EconomicsStochastic Views of Interacting Agents, pp. 52 - 65Publisher: Cambridge University PressPrint publication year: 2001