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| − | '''Agent-based computational economics (ACE)''' is the area of [[computational economics]] that studies economic processes, including whole [[economy|economies]], as [[dynamic system]]s of interacting [[Agent (economics)|agents]]. As such, it falls in the [[paradigm]] of [[complex adaptive system]]s.<ref>• [[W. Brian Arthur]], 1994. "Inductive Reasoning and Bounded Rationality," ''American Economic Review'', 84(2), pp. [http://www-personal.umich.edu/~samoore/bit885f2011/arthur-inductive.pdf 406-411].<br/> • [[Leigh Tesfatsion]], 2003. "Agent-based Computational Economics: Modeling Economies as Complex Adaptive Systems," ''Information Sciences'', 149(4), pp. [http://copper.math.buffalo.edu/urgewiki/uploads/Literature/Tesfatsion2002.pdf 262-268].</ref> In corresponding [[agent-based model]]s, the "[[agent (economics)|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.<ref>Scott E. Page (2008). "agent-based models," ''[[The New Palgrave Dictionary of Economics]]'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_A000218&edition=current&q=agent-based%20computational%20modeling&topicid=&result_number=1 Abstract].</ref>
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| − | The theoretical assumption of [[mathematical optimization]] by agents in [[equilibrium (economics)| equilibrium]] is replaced by the less restrictive postulate of agents with [[bounded rationality]] ''adapting'' to market forces.<ref>• [[John H. Holland]] and John H. Miller (1991). "Artificial Adaptive Agents in Economic Theory," ''American Economic Review'', 81(2), pp. [http://www.santafe.edu/media/workingpapers/91-05-025.pdf 365-370] p. 366.<br/> • [[Thomas C. Schelling]] (1978 [2006]). ''Micromotives and Macrobehavior'', Norton. [http://books.wwnorton.com/books/978-0-393-32946-9/ Description], [http://books.google.com/books?id=DenWKRgqzWMC&printsec=find&pg=PA1=#v=onepage&q&f=false preview].<br/> •
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| − | [[Thomas J. Sargent]], 1994. ''Bounded Rationality in Macroeconomics'', Oxford. [http://www.oup.com/us/catalog/general/subject/Economics/MacroeconomicTheory/?view=usa&ci=9780198288695 Description] and chapter-preview 1st-page [http://www.questia.com/library/book/bounded-rationality-in-macroeconomics-thomas-j-sargent-by-thomas-j-sargent.jsp links.]</ref> ACE models apply [[numerical methods]] of analysis to [[Computer simulation|computer-based simulations]] of complex dynamic problems for which more conventional methods, such as theorem formulation, may not find ready use.<ref>• Kenneth L. Judd, 2006. "Computationally Intensive Analyses in Economics," ''Handbook of Computational Economics'', v. 2, ch. 17, Introduction, p. 883. [Pp. [http://books.google.com/books?hl=en&lr=&id=6ITfRkNmKQcC&oi=fnd&pg=PA881&ots=2j0cCBB5S6&sig=a1DlAKMWcxFQZwSkGVVp2zlHIb8#v=onepage&q&f=false 881-] 893. Pre-pub [http://www2.econ.iastate.edu/tesfatsi/Judd.finalrev.pdf PDF]].
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| − | <br/> • _____, 1998. ''Numerical Methods in Economics'', MIT Press. Links to [http://mitpress.mit.edu/catalog/item/default.asp?ttype=2&tid=3257 description] and [http://books.google.com/books?id=9Wxk_z9HskAC&pg=PR7&source=gbs_toc_r&cad=3#v=onepage&q&f=false chapter previews].</ref> 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]].<ref>• Leigh Tesfatsion (2002). "Agent-Based Computational Economics: Growing Economies from the Bottom Up," ''Artificial Life'', 8(1), pp.55-82. [http://www.mitpressjournals.org/doi/abs/10.1162/106454602753694765 Abstract] and pre-pub [http://www.econ.brown.edu/fac/Peter_Howitt/SummerSchool/Agent.pdf PDF].<br/> • _____ (1997). "How Economists Can Get Alife," in W. B. Arthur, S. Durlauf, and D. Lane, eds., ''The Economy as an Evolving Complex System, II'', pp. 533-564. Addison-Wesley. Pre-pub [http://ageconsearch.umn.edu/bitstream/18196/1/er37.pdf PDF].</ref>
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| − | ACE has a similarity to, and overlap with, [[game theory]] as an agent-based method for modeling social interactions.<ref name="COMP>">• [[Joseph Y. Halpern]] (2008). "computer science and game theory," ''The New Palgrave Dictionary of Economics'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_C000566&edition=current&q=&topicid=&result_number=1 Abstract].<br/> • Yoav Shoham (2008). "Computer Science and Game Theory," ''Communications of the ACM'', 51(8), pp.
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| − | [http://www.robotics.stanford.edu/~shoham/www%20papers/CSGT-CACM-Shoham.pdf 75-79].<br/> • [[Alvin E. Roth]] (2002). "The Economist as Engineer: Game Theory, Experimentation, and Computation as Tools for Design Economics," ''Econometrica'', 70(4), pp. [http://kuznets.fas.harvard.edu/~aroth/papers/engineer.pdf 1341–1378].</ref> 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.<ref>Tesfatsion, Leigh (2006), "Agent-Based Computational Economics: A Constructive Approach to Economic Theory," ch. 16, ''Handbook of Computational Economics'', v. 2, part 2, ACE study of economic system. [http://www.sciencedirect.com/science/article/pii/S1574002105020162 Abstract] and pre-pub [http://econ2.econ.iastate.edu/tesfatsi/hbintlt.pdf PDF].</ref>
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| − | 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."<ref>• Leigh Tesfatsion (2006). "Agent-Based Computational Economics: A Constructive Approach to Economic Theory," ch. 16, ''Handbook of Computational Economics'', v. 2, [pp. 831-880] sect. 5. [http://www.sciencedirect.com/science/article/pii/S1574002105020162 Abstract] and pre-pub [http://econ2.econ.iastate.edu/tesfatsi/hbintlt.pdf PDF].<br/> • [[Kenneth L. Judd]] (2006). "Computationally Intensive Analyses in Economics," ''Handbook of Computational Economics'', v. 2, ch. 17, pp. [http://books.google.com/books?hl=en&lr=&id=6ITfRkNmKQcC&oi=fnd&pg=PA881&ots=2j0cCBB5S6&sig=a1DlAKMWcxFQZwSkGVVp2zlHIb8#v=onepage&q&f=false 881-] 893. Pre-pub [http://www2.econ.iastate.edu/tesfatsi/Judd.finalrev.pdf PDF].<br/> • Leigh Tesfatsion and Kenneth L. Judd, ed. (2006). ''Handbook of Computational Economics'', v. 2. [http://www.elsevier.com/wps/find/bookdescription.cws_home/660847/description#description Description] & and chapter-preview
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| − | [http://www.sciencedirect.com/science?_ob=PublicationURL&_hubEid=1-s2.0-S1574002105X02003&_cid=273377&_pubType=HS&_auth=y&_acct=C000228598&_version=1&_urlVersion=0&_userid=10&md5=e4757b4f65755ed6340a11fee9615200 links.]</ref> The subject has been applied to research areas like [[asset pricing]],<ref name=arthuretal>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.</ref> [[competition]] and [[collaboration]],<ref>[[Robert Axelrod]] (1997). ''The Complexity of Cooperation: Agent-Based Models of Competition and Collaboration'', Princeton. [http://press.princeton.edu/titles/6144.html Description], [http://press.princeton.edu/titles/6144.html#TOC contents], and [http://books.google.com/books?id=J0dgRGMdjmQC&printsec=find&pg=PR11#v=onepage&q&f=false preview].</ref> [[transaction cost]]s,<ref>Tomas B. Klosa and Bart Nooteboom, 2001. "Agent-based Computational Transaction Cost Economics," ''Journal of Economic Dynamics and Control'' 25(3–4), pp. 503–52. [http://www.sciencedirect.com/science/article/pii/S0165188900000348 Abstract.]</ref> [[market structure]] and [[industrial organization]] and dynamics,<ref>• Roberto Leombruni and Matteo Richiardi, ed. (2004), ''Industry and Labor Dynamics: The Agent-Based Computational Economics Approach.'' World Scientific Publishing ISBN 981-256-100-5. [http://www.worldscibooks.com/economics/5706.html Description] and chapter-preview [http://books.google.com/books?id=P5O7A5D55nQC&printsec=fond&pg=PR5#v=onepage&q&f=false links].<br/> • [[Joshua M. Epstein]] (2006). "Growing Adaptive Organizations: An Agent-Based Computational Approach," in ''Generative Social Science: Studies in Agent-Based Computational Modeling'', pp. 309[http://books.google.com/books?hl=en&lr=&id=543OS3qdxBYC&oi=fnd&pg=PA326&dq=false#v=onepage&q=false&f=false -] 344. [http://press.princeton.edu/titles/8277.html Description] and [http://www.santafe.edu/research/working-papers/abstract/99895b6465e8b87656612f8e3570b34c/ abstract].</ref> [[welfare economics]],<ref>[[Robert Axtell]] (2005). "The Complexity of Exchange," ''Economic Journal'', 115(504, Features), pp. [http://econfaculty.gmu.edu/pboettke/workshop/archives/f05/Axtell.pdf F193-F210].</ref> and [[mechanism design]],<ref>• ''The New Palgrave Dictionary of Economics'' (2008), 2nd Edition: <br/> [[Roger B. Myerson]] "mechanism design." [http://www.dictionaryofeconomics.com/article?id=pde2008_M000132&edition=current&q=mechanism%20design&topicid=&result_number=3 Abstract.] <br/> _____. "revelation principle." [http://www.dictionaryofeconomics.com/article?id=pde2008_R000137&edition=current&q=moral&topicid=&result_number=1 Abstract.]<br/> Tuomas Sandholm. "computing in mechanism design." [http://www.dictionaryofeconomics.com/article?id=pde2008_C000563&edition=&field=keyword&q=algorithmic%20mechanism%20design&topicid=&result_number=1 Abstract.]<br/> • [[Noam Nisan]] and Amir Ronen (2001). "Algorithmic Mechanism Design," ''Games and Economic Behavior'', 35(1-2), pp. [http://www.cs.cmu.edu/~sandholm/cs15-892F09/Algorithmic%20mechanism%20design.pdf 166–196].<br/> • [[Noam Nisan]] ''et al''., ed. (2007). ''Algorithmic Game Theory'', Cambridge University Press. [http://www.cup.cam.ac.uk/asia/catalogue/catalogue.asp?isbn=9780521872829 Description].</ref> [[Information economics|information and uncertainty]],<ref>Tuomas W. Sandholm and Victor R. Lesser (2001). "Leveled Commitment Contracts and Strategic Breach," ''Games and Economic Behavior'', 35(1-2), pp. [http://www.cs.cmu.edu/afs/.cs.cmu.edu/Web/People/sandholm/leveled.geb.pdf 212-270].</ref> [[macroeconomics]],<ref>• [[David Colander]], [[Peter Howitt]], Alan Kirman, [[Axel Leijonhufvud]], and [[Perry Mehrling]], 2008. "Beyond DSGE Models: Toward an Empirically Based Macroeconomics," ''American Economic Review'', 98(2), pp. [http://www.jstor.org/pss/29730026 236]-240. Pre-pub [http://www.econ.brown.edu/fac/peter_howitt/publication/complex%20macro6.pdf PDF].<br/> • [[Thomas J. Sargent]] (1994). ''Bounded Rationality in Macroeconomics'', Oxford. [http://www.oup.com/us/catalog/general/subject/Economics/MacroeconomicTheory/?view=usa&ci=9780198288695 Description] and chapter-preview 1st-page [http://www.questia.com/library/book/bounded-rationality-in-macroeconomics-thomas-j-sargent-by-thomas-j-sargent.jsp links].<br/> • M. Oeffner (2009). '[http://www.opus-bayern.de/uni-wuerzburg/volltexte/2009/3927/pdf/OeffnerDissohneAnhang.pdf Agent-based Keynesian Macroeconomics]'. PhD thesis, Faculty of Economics, University of Würzburg.</ref> and [[Marxist economics]].<ref>A. F. Cottrell, P. Cockshott, G. J. Michaelson, I. P. Wright, V. Yakovenko
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| − | (2009), ''Classical Econophysics.'' Routledge, ISBN 978-0-415-47848-9.</ref><ref>Leigh Tesfatsion (2006), "Agent-Based Computational Economics: A Constructive Approach to Economic Theory," ch. 16, ''Handbook of Computational Economics'', v. 2, part 2, ACE study of economic system. [http://www.sciencedirect.com/science/article/pii/S1574002105020162 Abstract] and pre-pub [http://econ2.econ.iastate.edu/tesfatsi/hbintlt.pdf PDF].</ref>
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| − | ==Overview==
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| − | The "[[Agent (economics)|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.<ref>[http://www.socsci.aau.dk/ae2006/ Summary of methods]: ''Department of Economics, Politics and Public Administration, Aalborg University, Denmark'' website.</ref> Issues include those common to [[experimental economics]] in general<ref>[[Vernon L. Smith]], 2008. "experimental economics," ''The New Palgrave Dictionary of Economics'', 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_E000277&q=experimental%20&topicid=&result_number=2 Abstract].</ref> and development of a common framework for empirical validation and resolving open questions in agent-based modeling.<ref>Giorgio Fagiolo, Alessio Moneta, and Paul Windrum, 2007. "A Critical Guide to Empirical Validation of Agent-Based Models in Economics: Methodologies, Procedures, and Open Problems," ''Computational Economics'', 30, pp. [http://www.springerlink.com/content/t683473172528275/ 195]–226.</ref>
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| − | ACE is an officially designated special interest group (SIG) of the Society for Computational Economics.<ref>[http://comp-econ.org/ Society for Computational Economics] website.</ref> Researchers at the [[Santa Fe Institute]] have contributed to the development of ACE.
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| − | ==Example: finance==
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| − | One area where ACE methodology has frequently been applied is asset pricing. [[W. Brian Arthur]], [[Eric Baum]], [[William A. Brock (economist)|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.<ref name=arthuretal/><ref>W. Brock and C. Hommes (1997), 'A rational route to randomness.' ''Econometrica'' 65 (5), pp. 1059-1095.</ref><ref>C. Hommes (2008), 'Interacting agents in finance,' in ''The New Palgrave Dictionary of Economics''.</ref> 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,<ref>W. Brock, C. Hommes, and F. Wagener (2009), 'More hedging instruments may destabilize markets.' CeNDEF Working Paper.</ref> and some papers have suggested that ACE might be a useful methodology for understanding the recent [[financial crisis]].<ref>M. Buchanan (2009), '[http://pagesperso-orange.fr/mark.buchanan/nature_economic_modelling.pdf Meltdown modelling. Could agent-based computer models prevent another financial crisis?].' Nature, Vol. 460, No. 7256. (05 August 2009), pp. 680-682.</ref><ref>J.D. Farmer, D. Foley (2009), 'The economy needs agent-based modelling.' Nature, Vol. 460, No. 7256. (05 August 2009), pp. 685-686.</ref>
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| − | ==See also==
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| − | * [[ACEGES]]
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| − | * [[Agent-based social simulation]]
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| − | * [[Computational economics]]
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| − | * [[Econophysics]]
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| − | * [[Macroeconomic model]]
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| − | * [[Multi-agent system]]
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| − | * [[Statistical finance]]
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| − | ==References==
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| − | {{Reflist}}
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| − | ==Further reading==
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| − | *John Duffy (2006), '[http://www.pitt.edu/~jduffy/papers/duffy2006.pdf Agent-based models and human subject experiments].' Ch. 19 of L. Tesfatsion and K.L. Judd, eds., ''Handbook of Computational Economics'', Vol. 2 (Amsterdam: Elsevier, 2006), pp. 949–1011.
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| − | *[[Sheri Markose]], Jasmina Arifovic, and Shyam Sunder (2007), [http://www.sciencedirect.com/science/article/B6V85-4NJP97X-1/2/96092ac2dfab95f0f07a16f67203e605 'Advances in experimental and agent-based modelling: Asset markets, economic networks, computational mechanism design, and evolutionary game dynamics.'] ''[[Journal of Economic Dynamics and Control]]'' 31, pp. 1801–07.
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| − | *Shoham, Yoav, and Kevin Leyton-Brown, "[http://www.masfoundations.org/ Multiagent Systems: Algorithmic, Game-Theoretic, and Logical Foundations]". Cambridge University Press, 2009.
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| − | ==External links==
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| − | *[http://www.econ.iastate.edu/tesfatsi/ace.htm Agent Based Computational Economics] - Leigh Tesfatsion's website on ACE at Iowa State University
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| − | *[http://p.seppecher.free.fr/jamel JAMEL (a Java Agent-based MacroEconomic Laboratory)] - An on-line, interactive agent-based macroeconomic model
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| − | * [http://www.scribd.com/doc/57052045/The-Use-of-Agent-Based-Models-in-Regional-Science-by-Mark-Kimura The Use of Agent-Based Models in Regional Science] - a study on agent-based models to simulate urban agglomeration
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| − | * [http://learning.londonmet.ac.uk/LMBS/aceges/ACEGESApplet/ACEGESApplet.html ACEGES] - An on-line, interactive agent-based model of the global energy system
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| − | *[http://jcat.sourceforge.net/ JCAT] - A scalable and versatile experimental platform for ACE; used as the Server and Agentware for the Trading Agent Competition on Market Design (also known as the CAT Game)
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| − | [[Category:Mathematical economics]]
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| − | [[Category:Computational economics]]
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| − | [[Category:Monte Carlo methods in finance]]
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