Out-of-Equilibrium Economics and Agent-Based Modeling

Arthur, W.B. (2005). Out-of-Equilibrium Economics and Agent-Based Modeling. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-05-046

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Abstract

Standard neoclassical economics asks what agents' actions, strategies, or expectations are in equilibrium with (consistent with) the outcome or pattern these behaviors aggregatively create. Agent-based computational economics enables us to ask a wider question: how agents' actions, strategies, or expectations might react to- might endogenously change with- the patterns they create. In other words, it enables us to examine how the economy behaves out of equilibrium, when it is not at a steady state.

This out-of-equilibrium approach is not a major adjunct to standard economic theory; it is economics done in a more general way. When examined out of equilibrium, economic patterns sometimes simplify into a simple, homogeneous equilibrium of standard economics; but just as often they show perpetually novel and complex behavior. The static equilibrium approach suffers two characteristic indeterminancies: it cannot easily resolve among multiple equilibria; nor can it easily model individuals' choices of expectations. Both problems are ones of formation (of an equilibrium and of an "ecology" of expectations, respectively), and when analyzed in formation - that is, out of equilibrium - these anomalies disappear.

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