This week’s “economic focus” in the Economist highlights Agent Based Modeling as an alternative to traditional economic models and methods. As I am currently teaching Agent Based approaches to modeling as part of the ICPSR Introduction to Computing for Complex Systems, I am quite pleased to see this coverage. Indeed, the timing could not be better and I plan to highlight this article in the course!
Here are some highlights from the article: “… Agent-based modelling does not assume that the economy can achieve a settled equilibrium. No order or design is imposed on the economy from the top down. Unlike many models, ABMs are not populated with “representative agents”: identical traders, firms or households whose individual behaviour mirrors the economy as a whole. Rather, an ABM uses a bottom-up approach which assigns particular behavioural rules to each agent. For example, some may believe that prices reflect fundamentals whereas others may rely on empirical observations of past price trends. Crucially, agents’ behaviour may be determined (and altered) by direct interactions between them, whereas in conventional models interaction happens only indirectly through pricing. This feature of ABMs enables, for example, the copycat behaviour that leads to “herding” among investors. The agents may learn from experience or switch their strategies according to majority opinion. They can aggregate into institutional structures such as banks and firms …” For those who are interested, I have made similar points in the post “Complex Models for Dynamic Time Evolving Landscapes –or– Herb Gintis Offers a Strong Rebuke of “Meltdown.“