The Power of Agent-Based Modeling

This post briefly describes several different approaches to software modeling. My specialty is in Agent-Based Modeling (ABM), where systems are described from the “bottom up.” This means looking at the system from the perspective of the individual actors in it—it might be consumers in a product category, cars on a road network, or plants and animals in an ecosystem. ABM stands in contrast to top-down modeling, where one looks at a system as a whole and describes its behavior with equations.

The top down approach can work when

1. You know the behavior patterns for the system and
2. You can write (and solve) equations for the system

For a real-world system like a container of oxygen molecules, this approach works. There are laws in chemistry such as the ideal gas law that enables any high school student to calculate what happens to the gas when you compress or heat up the container.

However, many systems of interest are not that simple. Sometimes you don’t know the behavior patterns that might occur. Take the banking industry for example. When the regulations were put in place (or removed) regarding how home loans were made, no one anticipated the sub-prime meltdown. Even allowing that those responsible for the regulations were expert and responsible, it appears they were not aware of all the possible patterns of behavior in the system.

Suppose you built a model at the level of individual home buyers and banks, imposed the regulations upon them, gave these “agents” the motivation to buy houses and make money, and enabled them to explore any strategy that was legal (or they could get away with because of inability to enforce regulations). Wind this up and set it in motion.

I would bet that if you ran it a thousand times, under different initial conditions and external factors, you would find some scenarios in which things play out like they have in the real world. These results could be used to refine the regulations (or determine the amount of regulatory oversight necessary) to keep the system operating in a zone where we get to keep our jobs, our homes and our 401Ks.

This is power of agent-based modeling.