Chapter 14. Modeling a Heterogeneous World

This chapter takes as its starting point the idea that any model of the economy must have heterogeneous agents. Such agents together form a complex adaptive system where the aggregate behavior emerges from the interaction between the individuals. Such systems do not lend themselves to being modeled analytically. We use three examples to illustrate how one is obliged to use agent based models to capture the dynamics of such systems. For our first example, the Marseille fish market, we show how to move beyond the most simplistic theoretical model we have to move to a computational approach. We then look at the effect of a potential shock to a financial market, and finally at the heterogeneity of the financial system. The last two expose the futility of trying to develop a complete analytical model. We argue for specific models for specific cases. This is a more engineering approach but perhaps a more realistic one.