Empirical models, rules, and optimization
This paper considers supply decisions by firms in a dynamic setting with adjustment costs and compares the behavior of an optimal control model to that of a rule-based system which relaxes the assumption that agents are explicit optimizers. In our approach, the economic agent uses believably simple rules in coping with complex situations. We estimate rules using an artificially generated sample obtained by running repeated simulations of a dynamic optimal control model of a firm's hiring/firing decisions. We show that (i) agents using heuristics can behave as if they were seeking rationally to maximize their dynamic returns; (ii) the approach requires fewer behavioral assumptions relative to dynamic optimization and the assumptions made are based on economically intuitive theoretical results linking rule adoption to uncertainty; (iii) the approach delineates the domain of applicability of maximization hypotheses and describes the behavior of agents in situations of economic disequilibrium. The approach adopted uses concepts from fuzzy control theory. An agent, instead of optimizing, follows Fuzzy Associative Memory (FAM) rules which, given input and output data, can be estimated and used to approximate any non-linear dynamic process. Empirical results indicate that the fuzzy rule-based system performs extremely well in approximating optimal dynamic behavior in situations with limited noise.
|Date of creation:||2000|
|Date of revision:|
|Contact details of provider:|| Postal: 2033 K Street, NW, Washington, DC 20006|
Web page: http://www.ifpri.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Arthur, W Brian, 1994. "Inductive Reasoning and Bounded Rationality," American Economic Review, American Economic Association, vol. 84(2), pages 406-11, May.
- Dixit, Avinash, 1997. "Investment and Employment Dynamics in the Short Run and the Long Run," Oxford Economic Papers, Oxford University Press, vol. 49(1), pages 1-20, January.
- Ramon Marimon, 1993.
"Adaptive learning, evolutionary dynamics and equilibrium selection in games,"
Economics Working Papers
23, Department of Economics and Business, Universitat Pompeu Fabra.
- Marimon, Ramon, 1993. "Adaptive learning, evolutionary dynamics and equilibrium selection in games," European Economic Review, Elsevier, vol. 37(2-3), pages 603-611, April.
- Heiner, Ronald A., 1989. "The origin of predictable dynamic behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 12(2), pages 233-257, October.
- Thaler, Richard H, 1988. "Anomalies: The Winner's Curse," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 191-202, Winter.
- Akerlof, George A & Yellen, Janet L, 1987. "Rational Models of Irrational Behavior," American Economic Review, American Economic Association, vol. 77(2), pages 137-42, May.
- Marimon, Ramon & McGrattan, Ellen & Sargent, Thomas J., 1990. "Money as a medium of exchange in an economy with artificially intelligent agents," Journal of Economic Dynamics and Control, Elsevier, vol. 14(2), pages 329-373, May.
- Holland, John H & Miller, John H, 1991. "Artificial Adaptive Agents in Economic Theory," American Economic Review, American Economic Association, vol. 81(2), pages 365-71, May.
- Richard H. Day & E. Herbert Tinney, 1968. "How to Co-operate in Business without Really Trying: A Learning Model of Decentralized Decision Making," Journal of Political Economy, University of Chicago Press, vol. 76, pages 583.
- Sidney G. Winter, 1971. "Satisficing, Selection, and the Innovating Remnant," The Quarterly Journal of Economics, Oxford University Press, vol. 85(2), pages 237-261.
- Nickell, S J, 1978. "Fixed Costs, Employment and Labour Demand over the Cycle," Economica, London School of Economics and Political Science, vol. 45(180), pages 329-45, November.
- John Conlisk, 1983. "Competitive Approximation of a Cournot Market," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 597-607.
- Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 381-402.
- Winter, Sidney G., 1982. "Binary choice and the supply of memory," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 277-321, December.
- John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
- Heiner, Ronald A, 1983. "The Origin of Predictable Behavior," American Economic Review, American Economic Association, vol. 73(4), pages 560-95, September.
- Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
When requesting a correction, please mention this item's handle: RePEc:fpr:tmddps:53. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.