Agent-Based Modeling in Economics and Finance: Past, Present, and Future
Robert L. Axtell
J. Doyne Farmer
Journal of Economic Literature (Forthcoming)
Agent-based modeling (ABM) is a novel computational methodology for representing the behavior of individuals in order to study social phenomena. Its use is rapidly growing in many fields. We review ABM in economics and finance and highlight how it can be used to relax conventional assumptions in standard economic models. ABM has enriched our understanding of markets, industrial organization, labor, macro, development, public policy and environmental economics. In financial markets, substantial accomplishments include understanding clustered volatility, market impact, systemic risk and housing markets. We present a vision for how ABMs might be used in the future to build more realistic models of the economy and review some of hurdles that must be overcome to achieve this.