Heterogeneous Agent Models in Economics and Finance, In: Handbook of Computational Economics II: Agent-Based Computational Economics, edited by Leigh Tesfatsion and Ken Judd , Elsevier, Amsterdam 2006, pp.1109-1186.

This chapter surveys work on dynamic heterogeneous agent models (HAMs) in economics and finance. Emphasis is given to simple models that, at least to some extent, are tractable by analytic methods in combination with computational tools. Most of these models are behavioral models with boundedly rational agents using different heuristics or rule of thumb strategies that may not be perfect, but perform reasonably well. Typically these models are highly nonlinear, e.g. due to evolutionary switching between strategies, and exhibit a wide range of dynamical behavior ranging from a unique stable steady state to complex, chaotic dynamics. Aggregation of simple interactions at the micro level may generate sophisticated structure at the macro level. Simple HAMs can explain important observed stylized facts in financial time series, such as excess volatility, high trading volume, temporary bubbles and trend following, sudden crashes and mean reversion, clustered volatility and fat tails in the returns distribution.

Individual Expectations and Aggregate Behavior in Learning to Forcast Experiments

Models with heterogeneous interacting agents explain macro phenomena through interactions at the micro level. We propose genetic algorithms as a model for individual expectations to explain aggregate market phenomena. The model explains all stylized facts observed in aggregate price fluctuations and individual forecasting behaviour in recent learning to forecast laboratory experiments with human subjects (Hommes et al. 2007), simultaneously and across different treatments.

Integrated urban evolutionary modeling

Cellular automata models have proved rather popular as frameworks for simulating the physical growth of cities. Yet their brief history has been marked by a lack of application to real policy contexts, notwithstanding their obvious relevance to topical problems such as urban sprawl. Traditional urban models which emphasize transportation and demography continue to prevail despite their limitations in simulating realistic urban dynamics. To make progress, it is necessary to link CA models to these more traditional forms, focusing on the explicit simulation of the socio-economic attributes of land use activities as well as spatial interaction. There are several ways of tackling this but all are based on integration using various forms of strong and loose coupling which enable generically different models to be connected. Such integration covers many different features of urban simulation from data and software integration to internet operation, from interposing demand with the supply of urban land to enabling growth, location, and distributive mechanisms within such models to be reconciled. Here we will focus on developin

Complex evolutionary systems in behavioral finance

Traditional finance is built on the rationality paradigm. This chapter discusses simple models from an alternative approach in which financial markets are viewed as complex evolutionary systems. Agents are boundedly rational and base their investment decisions upon market forecasting heuristics. Prices and beliefs about future prices co-evolve over time with mutual feedback. Strategy choice is driven by evolutionary selection, so that agents tend to adopt strategies that were successful in the past. Calibration of "simple complexity models" with heterogeneous expectations to real financial market data and laboratory experiments with human subjects are also discussed.

Models of Transportation and Land Use Change: A Guide to the Territory

Modern urban regions are highly complex entities. Despite the difficulty of modeling every relevant aspect of an urban region, researchers have produced a rich variety models dealing with inter-related processes of urban change. The most popular types of models have been those dealing with the relationship between transportation network growth and changes in land use and the location of economic activity, embodied in the concept of accessibility. This paper reviews some of the more common frameworks for modeling transportation and land use change, illustrating each with some examples of operational models that have been applied to real-world settings.Transport, land use, models, review network growth, induced demand, induced supply

Early Warning Analysis for Social Diffusion Events

There is considerable interest in developing predictive capabilities for social diffusion processes, for instance to permit early identification of emerging contentious situations, rapid detection of disease outbreaks, or accurate forecasting of the ultimate reach of potentially viral ideas or behaviors. This paper proposes a new approach to this predictive analytics problem, in which analysis of meso-scale network dynamics is leveraged to generate useful predictions for complex social phenomena. We begin by deriving a stochastic hybrid dynamical systems (S-HDS) model for diffusion processes taking place over social networks with realistic topologies; this modeling approach is inspired by recent work in biology demonstrating that S-HDS offer a useful mathematical formalism with which to represent complex, multi-scale biological network dynamics. We then perform formal stochastic reachability analysis with this S-HDS model and conclude that the outcomes of social diffusion processes may depend crucially upon the way the early dynamics of the process interacts with the underlying network's community structure and core-periphery structure. This theoretical finding provides the foundations for developing a machine learning algorithm that enables accurate early warning analysis for social diffusion events. The utility of the warning algorithm, and the power of network-based predictive metrics, are demonstrated through an empirical investigation of the propagation of political memes over social media networks. Additionally, we illustrate the potential of the approach for security informatics applications through case studies involving early warning analysis of large-scale protests events and politically-motivated cyber attacks

Empirical Validation of Agent Based Models: A Critical Survey

This paper addresses the problem of finding the appropriate method for conducting empirical validation in agent-based (AB) models, which is often regarded as the Achilles’ heel of the AB approach to economic modelling. The paper has two objectives. First, to identify key issues facing AB economists engaged in empirical validation. Second, to critically appraise the extent to which alternative approaches deal with these issues. We identify a first set of issues that are common to both AB and neoclassical modellers and a second set of issues which are specific to AB modellers. This second set of issues is captured in a novel taxonomy, which takes into consideration the nature of the object under study, the goal of the analysis, the nature of the modelling assumptions, and the methodology of the analysis. Having identified the nature and causes of heterogeneity in empirical validation, we examine three important approaches to validation that have been developed in AB economics: indirect calibration, the Werker-Brenner approach, and the history-friendly approach. We also discuss a set of open questions within empirical validation. These include the trade-off between empirical support and tractability of findings, the issue of over-parameterisation, unconditional objects, counterfactuals, and the non-neutrality of data.Empirical validation, agent-based models, calibration, history-friendly modelling

An Agent Operationalization Approach for Context Specific Agent-Based Modeling

The potential of agent-based modeling (ABM) has been demonstrated in various research fields. However, three major concerns limit the full exploitation of ABM; (i) agents are too simple and behave unrealistically without any empirical basis, (ii) \'proof of concept\' applications are too theoretical and (iii) too much value placed on operational validity instead of conceptual validity. This paper presents an operationalization approach to determine the key system agents, their interaction, decision-making and behavior for context specific ABM, thus addressing the above-mentioned shortcomings. The approach is embedded in the framework of Giddens\' structuration theory and the structural agent analysis (SAA). The agents\' individual decision-making (i.e. reflected decisions) is operationalized by adapting the analytical hierarchy process (AHP). The approach is supported by empirical system knowledge, allowing us to test empirically the presumed decision-making and behavioral assumptions. The output is an array of sample agents with realistic (i.e. empirically quantified) decision-making and behavior. Results from a Swiss mineral construction material case study illustrate the information which can be derived by applying the proposed approach and demonstrate its practicability for context specific agent-based model development.Agent Operationalization, Decision-Making, Analytical Hierarchy Process (AHP), Agent-Based Modeling, Conceptual Validation