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Encyclopedia of Complexity and Systems Science pp 1–30Cite as

Agent-Based Computational Economics

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Definition of the Subject

Mainstream economic models typically make the assumption that an entire group of agents, e.g., “investors,” can be modeled with a single “rational representative agent.” While this assumption has proven extremely useful in advancing the science of economics by yielding analytically tractable models, it is clear that the assumption is not realistic: people are different one from the other in their tastes, beliefs, and sophistication, and as many psychological studies have shown, they often deviate from rationality in systematic ways.

Agent-based computational economics is a framework allowing economics to expand beyond the realm of the “rational representative agent.” Modeling and simulating the behavior of each agent and the interaction among agents agent-based simulation allows us to investigate the dynamics of complex economic systems with many heterogeneous and not necessarily fully rational agents.

The agent-based simulation approach allows economists to...

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Abbreviations

Agent-based simulation:

A simulation of a system of multiple interacting agents (sometimes also known as “microscopic simulation”). The “micro” rules governing the actions of the agents are known and so are their rules of interaction. Starting with some initial conditions, the dynamics of the system are investigated by simulating the state of the system through discrete time steps. This approach can be employed to study general properties of the system, which are not sensitive to the initial conditions, or the dynamics of a specific system with fairly well-known initial conditions, e.g., the impact of the baby boomers’ retirement on the US stock market.

Bounded rationality:

Most economic models describe agents as being fully rational – given the information at their disposal, they act in the optimal way which maximizes their objective (or utility) function. This optimization may be technically very complicated requiring economic, mathematical, and statistical sophistication. In contrast, bounded-rational agents are limited in their ability to optimize. This limitation may be due to limited computational power, errors, or various psychological biases which have been experimentally documented.

Market anomalies:

Empirically documented phenomena that are difficult to explain within the standard rational-representative-agent economic framework. Some of these phenomena are the overreaction and underreaction of prices to news the autocorrelation of stock returns, various calendar and day-of-the-week effects, and the excess volatility of stock returns.

Representative agent:

A standard modeling technique in economics by which an entire class of agents (e.g., investors) are modeled by a single “representative” agent. If agents are completely homogeneous, it is obvious that the representative agent method is perfectly legitimate. However, when agents are heterogeneous, the representative agent approach can lead to a multitude of problems (see Kirman 1992).

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Authors and Affiliations

  1. The Hebrew University, Jerusalem, Israel

    Moshe Levy

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  1. Moshe Levy
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Correspondence to Moshe Levy .

Editor information

Editors and Affiliations

  1. Ramtech Ltd., Larkspur, California, USA

    Robert A. Meyers

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Levy, M. (2014). Agent-Based Computational Economics. In: Meyers, R. (eds) Encyclopedia of Complexity and Systems Science. Springer, New York, NY. https://doi.org/10.1007/978-3-642-27737-5_6-7

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  • DOI: https://doi.org/10.1007/978-3-642-27737-5_6-7

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  • Online ISBN: 978-3-642-27737-5

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