Foundations of complexity economics

Abstract

Conventional, neoclassical economics assumes perfectly rational agents (firms, consumers, investors) who face well-defined problems and arrive at optimal behaviour consistent with - in equilibrium with - the overall outcome caused by this behaviour. This rational, equilibrium system produces an elegant economics, but is restrictive and often unrealistic. Complexity economics relaxes these assumptions. It assumes that agents differ, that they have imperfect information about other agents and must, therefore, try to make sense of the situation they face. Agents explore, react and constantly change their actions and strategies in response to the outcome they mutually create. The resulting outcome may not be in equilibrium and may display patterns and emergent phenomena not visible to equilibrium analysis. The economy becomes something not given and existing but constantly forming from a developing set of actions, strategies and beliefs - something not mechanistic, static, timeless and perfect but organic, always creating itself, alive and full of messy vitality.

Keywords: Complex networks; Engineering.

Fig. 1. Attendance at the El Farol bar in the first 100 weeks.

Agents attend if they believe the total attendance that week will be no more than 60. Each creates their own set of plausible hypotheses or predictors of attendance, and, every week, acts on their currently most accurate one. Figure reprinted with permission from ref., AAAS.

Fig. 2. Prevalence of strategies in a simulated tournament of the prisoner’s dilemma.

Over time, strategies can evolve based on pressures exerted by other strategies. The lengths of labels indicate the memory depth of strategies, that is, how many previous moves in the game they take into account. Figure reprinted with permission from ref., Elsevier.