Modelling Bounded Rationality using Evolutionary Techniques - Bruce Edmonds

2 Modelling Boundedly Rational Economic Agents

If you seek to model real economic agents then, unless you make some very sweeping assumptions, the entities in your software model will also need the broad characteristics of the real agents. This is in contrast to traditional economics where, by and large, the agency nature of the agents is ignored, in favour of trying to capture their behaviour en masse.

Thus the purpose of an agent in such a model is different from either agents that are designed with a particular purpose in mind (e.g. [5]) or for exploration of the most effective and flexible algorithm for a set of problems. In such modelling one seeks for as much veracity as is possible given the usual limitations of time, cost and technique and one does not necessarily look to design them to be efficient, general, or consistent in their beliefs.

In particular we are interested in agents who:

do not have perfect information about their environment, in general it will only acquire information through interaction with its environment which will be dynamically changing;
do not have a perfect model of their environment;
have limited computational power, so they can't work out all the logical consequences of their knowledge [18];
other resources, like memory are limited (so they can't hold large populations of models);

In addition to these bounds on their rationality we also add some other observed characteristics of real economic agents, namely:

the mechanisms of learning dominate the mechanisms of deduction in deciding their action;
they tend to learn in an incremental, path-dependent [1] (or "exploitative") way rather than attempting a global search for the best possible model [16];
even though they can't perform inconsistent actions, they often entertain mutually inconsistent models and beliefs.

The fundamental difference between these agents and, say, logic-based agents, is that the updating of internal belief structures is done in a competitive evolutionary manner using a continuously variable fitness measure rather than in a "crisp" consistency preserving manner. This is appropriate in situations of great uncertainty caused by a rationality that is not able to completely "cope" with its environment but is more restricted in its ability.

Modelling Bounded Rationality using Evolutionary Techniques - Bruce Edmonds - 09 JUN 97

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