Heterogeneous Agent Models: Two Simple Case Studies
C. H. Hommes
University of Amsterdam; CeNDEF; Tinbergen Institute
Tinbergen Institute Discussion Paper No. TI 05-055/1
These notes review two simple heterogeneous agent models in economics and finance. The first is a cobweb model with rational versus naive agents introduced in Brock and Hommes (1997). The second is an asset pricing model with fundamentalists versus technical traders introduced in Brock and Hommes (1998). Agents are boundedly rational and switch between different trading strategies, based upon an evolutionary fitness measure given by realized past profits. Evolutionary switching creates a nonlinearity in the dynamics. Rational routes to randomness, that is, bifurcation routes to complicated dynamical behaviour occur when agents become more sensitive to differences in evolutionary fitness.
Number of Pages in PDF File: 36
Keywords: Interacting agents, complex adaptive systems, evolutionary dynamics, bounded rationality, nonlinear dynamics, bifurcations and chaos
JEL Classification: B4, C0, C6, D84, E3, G1, G12working papers series
Date posted: June 6, 2005
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