Agent-based computational economics

Agent-based computational economics (ACE) is the area of computational economics that studies
economic processes, including whole economies, as dynamic systems of interacting agents. As such, it falls
in the paradigm of complex adaptive systems.[1] 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.[2] Such
rules could also be the result of optimization, realized through use of AI methods (such as Q-learning and
other reinforcement learning techniques).[3]

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.[4] 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.[5] 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.[6]

ACE has a similarity to, and overlap with, game theory as an agent-based method for modeling social
interactions.[7] 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.[8]

The method has benefited from continuing improvements in modeling techniques of computer 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."[9] The subject has
been applied to research areas like asset pricing,[10] competition and collaboration,[11] transaction costs,[12]
market structure and industrial organization and dynamics,[13] welfare economics,[14] and mechanism
design,[15] information and uncertainty,[16] macroeconomics,[17] and Marxist economics.[18][19]

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.[20] Issues include those common to experimental economics in general[21] and
development of a common framework for empirical validation [22] and resolving open questions in agent-
based modeling.[23]
ACE is an officially designated special interest group (SIG) of the Society for Computational
Economics.[24] Researchers at the Santa Fe Institute 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.[10][25][26] 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,[27] and
some papers have suggested that ACE might be a useful methodology for understanding the 2008 financial
crisis.[28][29][30] See also discussion under Financial economics § Financial markets and § Departures from
rationality.

See also
ACEGES
Agent-based social simulation
Artificial economics
Artificial financial market
Computational economics
Econophysics
Macroeconomic model
Multi-agent system
Statistical finance

References
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