Standardization of Agent-based Modeling in Economics

Standardization of Agent-basedModeling in Economics∗

Xihao Li †

Department of Economics and Social Sciences (DiSES)

Universita Politecnica delle Marche

October, 2013

∗This notes is based on (Li, 2013). Comments are welcome! Please feel free to contact me.†

Department of Economics and Social Sciences (DiSES), Universita Politecnica delle Marche, PiazzaleMartelli 8, 60121 Ancona, Italy. Email: xihao.li@gmail.com. The author would like to thank Cathy Du, GaiaLi, and Sofia Li for invaluable support.

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Introduction: I

Agent-based modeling in economics is:

a study of economic system from ’bottom-up’: macro-level economy result from micro-level interaction of acollection of heterogenous economic agents, see (Tes-fatsion and Judd, 2006).

a growing branch in economic research:

increasing volume of related literature, e.g., (Gallegati et al.,2011), (Stiglitz and Gallegati, 2011), (Battiston et al., 2012), (Caccioliet al., 2012), (Delli Gatti et al., 2012), etc.

increasing support from funding agencies, e.g., EuropeanCommission supports research project “(FOC) FOrecasting financialCrises”, “(CRISIS) Complexity Research Initiative for Systemic Instabili-ties”, etc.

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Introduction: II

Agent-based economic research is an interdisciplinaryresearch, with intimate interaction between economistsand computer scientists (software engineer, computerprogrammers).

EconomicSystem

Economists: Agent-Based

ModelingLanguage

Agent-BasedModel

Computer Software System

ComputerProgrammers:

ComputerProgramming

Language

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Introduction: III

Agent-Based Model (ABM) — two sides of the same coin:

For economics: ABM is the formal model of the eco-nomic system in consideration for simulation;

For computer science (software development): ABMis the requirement specification and system model ofthe computer software system for simulation.

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Introduction: IV

ABM in current economic research is mainly:

following common practice in economic modeling, lackof consistency with general rules of system analysis anddesign in software development;difficult for computer programmers to understand therequirement and specification that economists demandin computer software system for simulation.

⇒ Problem: inefficiency of communication betweeneconomists and computer scientists hampers the ef-fectiveness of agent-based economic research.

This problem becomes crucial when agent-based eco-nomic research team gets bigger and/or is required todeliver the analysis under time constraint!

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Introduction: V

Question: Is there any way around this bottleneck ofcommunication between economists and computerscientists?

Analysis:Economic system from ‘bottom-up’ is agent-orientedcomplex system.From the perspective of economic research, economicsystem as well as economic agents, although complexand heterogenous, embeds with common character-istics in static view and in dynamic view.Agent-oriented software engineering in computer sci-ence provides general tools for agent-oriented systemanalysis and design, e.g., Multi-Agent Reasoning System (DMARS)

in (Rao and Georgeff, 1995), Gaia methodology in (Zambonelli et al., 2003),

etc.

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Introduction: VI

Idea:

Derive generalities of economic system and economicagents.

Apply these generalities with tools from agent-orientedsoftware engineering, to develop a “tailor-made”integrative framework that works as communicationprotocol for economists and computer scientists:

economists follow this integrative framework to analyzeand to develop agent-based model in a standardizedway;

computer programmers follow this integrative frame-work to translate the standardized agent-based modelinto computer codes.

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Generality of Economic system and EconomicAgent

Consider the following two aspects:

1 static view;

2 dynamic view;

with focus on:

1 economic system;

2 economic agent.

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Static View: Economic System

Consider economic system from ConstructivePerspectives of Economic System (CPES):

1 Scope of the economic system: its boundary and itsenvironment;

2 Interrelation between the economic system and itsenvironment;

3 Elements of the economic system: economic agentsconsidered in the economic system;

4 Structure of the economic system: interrelation amongelements of the economic system.

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Static View: Graphical Presentation for Structureof Economic System

Employ network diagram as graphical presentation for thestatic structure of economic system, to represent theinterrelation among economic agents.

Example: network diagram for stock market system with bondmarket as its environment.

Stock Market BondMarket

Market Center

Trader 1

Trader 4

…

Trader 2

Trader 3

TraderN

…

Trader 6

Trader 5

TraderN-1

TraderN-2

Tradern

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Static View: Economic Agents

Classify two types of economic agents:

Active economic agents: directly involved with thefunctionality of human subject, with autonomous andactive behavior to fulfill objectives; e.g., households,firms.

Passive economic agents: not directly involved withthe functionality of human subject; e.g., commoditiestraded in the market.

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Static View: Active economic agent

Admit the general structure of active economic agent, calledModules (elements) of Active Economic Agent (MAEA):

Module of Active Economic Agent

Submodule of

Information storage

Submodule of learning Environment

Submodule of information acquirement

Submodule of action transmission

Information flows

Information flows

Submodule of objectives

Submodule of forecasting

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Static View: Passive economic agent

Admit the general structure of passive economic agent,called Modules (elements) of Passive Economic Agent(MPEA), i.e., information container with a set of economicproperties.

For example,

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Dynamic View: Economic System

Dynamics of economic system results from active eco-nomic agents actively take action to fulfill their objec-tives.

⇒ Specification of active economic agent dynamics issufficient for dynamics of economic system.

On the other hand, to explicitly present in systemic-level the dynamics of economic system, it is useful toemploy diagram of agent interaction to visualize thesequence of agents’ activities, see (Example).

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Dynamic View: Active Economic Agent

Active economic agent dynamics has routine, called generaldecision-making process:

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Integrative framework: I

ABM for economic system requires:

static view. It boils down to specification of each sub-module in MAEA, specification of each economic prop-erty in MPEA, and specification of the static structure ofeconomic system.

dynamic view. Specification of active economic agentdynamics is sufficient for dynamics of economic system.

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Integrative framework: III

In this regard, integrative framework takes the followingmodeling procedure to develop ABM:

Static initialization:1 Initialize economic agents involved: specify each

submodule in MAEA for active economic agents, andspecify each economic property in MPEA for passiveeconomic agents;

2 Use network diagram to specify the initial structure ofeconomic system.

Dynamic specification:1 Specify dynamics of active economic agents with the

benchmark of general decision-making process;2 Use diagram of agent interaction to visualize the se-

quence of agents’ activities, so as to explicitly presentin systemic-level the dynamics of economic system.

Xihao Li Notes

Standardization of Agent-based Modeling in Economics Introduction Generality Integrative Framework Outlook

Outlook

Integrative framework serves as general guidance for an-alyzing economic system from ‘bottom-up’ and for seam-lessly translating economic system into standardized agent-based model;

Integrative framework serves as communication protocolbetween economists and computer scientists, as well asbetween agent-based economic research and other strands;

The standardization of agent-based model enhances itsreusability, i.e., part of or the whole of existing agent-basedmodel can be quickly adjusted and assembled together todevelop a new agent-based model.

Xihao Li Notes

References

Diagram of Agent Interaction: Example

Example: diagram of agent interaction for stock market systemwith bond market as its environment.

Start period t=1...T

End period t=1...T

Stock Market: Open

Market Center: disseminate trading information, collect

orders

Trader 1...N: make investment decision, submit order to trade

Trading information

Orders

Stock Market: Determine Price

Market Center: Determine stock price,

transaction volume, and payment for each order

Trader 1...N: Realize stock Price, transaction volume, and payment

for its order

Trading information

Payment

Bond Market: Trade risk-free asset

Bond Market: Determine risk-free asset price,

transaction volume, and payment

Trader 1...N: Make investement decision

for risk-free asset,realize transaction

Trading information

Payment

Xihao Li Notes

References

References I

Battiston, S., Gatti, D. D., Gallegati, M., Greenwald, B., and Stiglitz, J. E. (2012).Default cascades: When does risk diversification increase stability? Journalof Financial Stability, 8(3):138–149.

Caccioli, F., Catanach, T., and Farmer, J. (2012). Heterogeneity, correlations andfinancial contagion. Advances in Complex Systems, 15(2).

Delli Gatti, D., Gallegati, M., Greenwald, B. C., Russo, A., and Stiglitz, J. E. (2012).Mobility constraints, productivity trends, and extended crises. Journal ofEconomic Behavior & Organization, 83(3):375–393.

Gallegati, M., Palestrini, A., and Rosser, J. B. (2011). The period of financialdistress in speculative markets: Interacting heterogeneous agents andfinancial constraints. Macroeconomic Dynamics, 15(01):60–79.

Li, X. (2013). Standardization of agent-based modeling in economics. WorkingPaper. http://mpra.ub.uni-muenchen.de/47396/1/MPRA paper 47396.pdf.

Rao, A. S. and Georgeff, M. P. (1995). Formal models and decision proceduresfor multi-agent systems. Technical Note 61, Australian AI Institute.

Stiglitz, J. E. and Gallegati, M. (2011). Heterogeneous interacting agent modelsfor understanding monetary economies. Eastern Economic Journal,37(1):6–12.

Xihao Li Notes

References

References IITesfatsion, L. S. and Judd, K. L. (2006). Handbook of Computational Economics,

Vol. 2: Agent-Based Computational Economics. Handbooks in EconomicsSeries. North-Holland.

Zambonelli, F., Jennings, N. R., and Wooldridge, M. (2003). Developingmultiagent systems: The gaia methodology. ACM Transactions on SoftwareEngineering Methodology, 12(3):317–370.

Xihao Li Notes