Agent-Based Computational Economics (ACE)
Research Area: Evolution of Institutions and Social Norms

Last Updated: 3 June 2007

Site Maintained by: Leigh Tesfatsion Department of Economics Iowa State University Ames, Iowa 50011-1070 http://www.econ.iastate.edu/tesfatsi/ tesfatsi AT iastate.edu Online ACE Course (Self-Study eBook) ACE Website

Table of Contents: Key Issues Introductory Materials Other Readings Software, Toolkits, and Demos Resource Sites, Groups, and Individual Researchers

Key Issues

• Where do "institutions" and "social norms" come from?
• How does mutual cooperation manage to evolve in some economic contexts even when cheating reaps immediate gains?
• What roles do trust, reciprocity, retaliation, spitefulness, and punishment play in the evolution of economic institutions and social norms?
• To what extent are current economic institutions the result of bottom-up (grassroots) evolutionary processes? top-down design?
• How stable over time are economic institutions and social norms?
• Are these institutions and norms converging across countries?

Introductory Materials

• Axelrod, Robert (1984), The Evolution of Cooperation (pdf,41pp.,Chapters 1,2,9), Basic Books Inc., New York, NY.
  Abstract: Robert Axelrod conducted two computer tournaments to find an effective strategy for the Iterated Prisoner's Dilemma (IPD). Surprisingly, the simplest strategy submitted was the winner in both tournaments. The winning strategy was Tit-For-Tat, the strategy that cooperates on the first move and thereafter does whatever the other player did in the previous move. The selected chapters explain why understanding the IPD is important, how tournament results reveal what it takes to be successful in this context, and why reciprocity works well when paired with a wide range of strategies. Other chapters describe applications (including the "live and let live" system in trench warfare in World War I), provide theorems about the evolution of cooperation, and offer advice on how to promote cooperation.

  Evolution of Cooperation: Interactive Tutorial (html)

  Axelrod Tournament Demonstration Software (html)

  David F. Batten, Discovering Artificial Economics, Westview Press, 2000, Chapters 1-5.

  NOTE: The Batten book is unfortunately out of print. However, a pdf file for the entire Batten book (including figures) can be accessed here (pdf,17MB).

  Samuel Bowles, "Prologue" (pdf,89K,19pp), Microeconomics: Behavior, Institutions, and Evolution, Princeton University Press, Princeton, N.J., 2003.

  Colin F. Camerer, George Loewenstein, and Matthew Rabin, Advances in Behavioral Economics, Princeton University Press, Princeton, NJ, 776pp., 2003. The introductory chapter by Camerer and Loewenstein titled Behavioral Economics: Past, Present, Future is particularly recommended.

  Abstract: From the publisher: "Behavioral economics uses facts, models, and methods from neighboring sciences such as psychology, sociology, anthropology, and biology to establish descriptively accurate findings about human cognitive ability and social interaction and to explore the implications of these findings for economic behavior. ... Twenty years ago, behavioral economics did not exist as a field. Most economists were deeply skeptical--even antagonistic--toward the idea of importing insights from psychology into their field. Today, behavioral economics has become virtually mainstream. It is well represented in prominent journals and top economics departments, and behavioral economists, including several contributors to this volume, have garnered some of the most prestigious awards in the profession. This book assembles the most important papers on behavioral economics published since around 1990. Among the 25 articles are many that update and extend earlier foundational contributions, as well as cutting-edge papers that break new theoretical and empirical ground."

  Colin F. Camerer is Rea A. and Lela G. Axline Professor of Business Economics at the California Institute of Technology. He is the author of "Behavioral Game Theory "(Princeton). George Loewenstein is Professor of Economics and Psychology at Carnegie Mellon University. Matthew Rabin, Professor of Economics at the University of California, Berkeley, received the John Bates Clark Medal of the American Economics Association for 2001.

  Leigh Tesfatsion, "Modeling Behavior, Learning, and Social Interactions in Dynamic Market Contexts: An Agent-Based Computational Approach to Behavioral Economics" (pdf,306K).

  Abstract: This presentation addresses how core behavioral economics concerns (human cognition and social interactions) might be constructively modeled for dynamic markets using powerful new computer capabilities.

Other Readings

• Peter S. Albin and Duncan K. Foley, "The Co-Evolution of Cooperation and Complexity in a Multi-Player Local-Interaction Prisoners Dilemma", Complexity Vol. 6/No. 3, January/February 2001, 54-63.

• Robert Axelrod, The Evolution of Cooperation (pdf,41pp.,Chapters 1,2,9), Basic Books Inc., New York, NY, 1984.
  Abstract: In the late 1970s and early 1980s, Robert Axelrod conducted several Iterated Prisoner's Dilemma (IPD) computer tournaments to explore the conditions under which cooperation based on reciprocity could evolve and persist even among self-interested individuals. For example, in his first tournament, game theorists from all over the world were solicited for IPD strategies in the form of computer algorithms, and the submitted strategies were then pitted against each other in repeated round-robin plays of the IPD. The surprising winner was Tit-For-Tat, a simple strategy submitted by Anatol Rapoport (University of Michigan): Start by cooperating, and thereafter do whatever your partner did in the previous game play. This book summarizes his tournament findings and uses these findings to generate thought-provoking implications for private behavior and public policy in various concrete real-world situations.

  Robert Axelrod, "The Importance of Being Nice, Retaliatory, Forgiving, and Clear", The Economist, November 9, 1985.

  Robert Axelrod, "An Evolutionary Approach to Norms", American Political Science Review, Vol. 80, 1986, pp. 1095-1111. Published article available at JSTOR.

  Abstract: This article develops an agent-based model with a simple form of learning using the genetic algorithm to explore what can happen when many agents adapt to each other's behavior over time. Agents can be more or less bold (say by cheating), and more or less vengeful (say by reporting cheaters). The model shows the conditions under which a collective action problem can be solved by a self-sustaining metanorm: punish those who do not enforce the norm because others might punish you for not doing so.

  Robert Axelrod, The Complexity of Cooperation: Agent-Based Models of Conflict and Cooperation, Princeton University Press, 1997.

  Jonathan Bendor and Piotr Swistak, "The Evolutionary Advantage of Conditional Cooperation", Complexity, Vol. 4/No. 2, November/December 1998, 15-18.

  Jeffrey Carpenter, "Evolutionary Models of Bargaining: Comparing Agent-Based Computational and Analytical Approaches to Understanding Convention Evolution", Computational Economics 19(1), 2002, pp. 25-49. Downloadable at EconPapers.

  Edmund Chattoe, "Just How (Un)realistic are Evolutionary Algorithms as Representations of Social Processes?" (html), Journal of Artificial Societies and Social Simulation 1:3 (1998). [electronic journal]

  Rosaria Conte, "Intelligent Social Learning" (html), Journal of Artificial Societies and Social Simulation 4:1, 2001. [electronic journal]

  Joshua M. Epstein, "Zones of Cooperation in Demographic Prisoner's Dilemma", Complexity, Vol. 4/No. 2, November/December 1998, 36-48.

  Joshua M. Epstein, "Learning to be Thoughtless: Social Norms and Individual Competition", Computational Economics Vol. 18, 2001, 9-24. Published article freely available at Kluwer Online.

  Abstract: Epstein uses an agent-based model to study experimentally an important observed aspect of social norm evolution: namely, that the amount of time an individual devotes to thinking about a behavior tends to be inversely related to the strength of the social norms that relate to this behavior. In the limit, once a behavioral norm is firmly entrenched in a society, individuals tend to conform to the norm without explicit thought. Epstein's innovative model permits agents to learn how to behave (what behavioral norm to adopt) but it also permits agents to learn how much to think about how to behave.

  Joshua M. Epstein and Robert Axtell, Growing Artificial Societies: Social Science from the Bottom Up, MIT Press, 1996. (Sugarscape)

  Herb Gintis, Game Theory Evolving (html), Princeton University Press, June 2000.

  Abstract: This book is strongly problem-oriented. It stresses agent-based evolutionary dynamics, using illustrations from both economics and biology. The author highlights the `low rationality' aspects of game dynamics. He particularly emphasizes the need for better models of the individual actor in view of the large number of anomalies in the predictions of the traditional model of the `rational actor' uncovered in laboratory experiments with human subjects.

  Jonathan Haas, "A Brief Consideration of Cultural Evolution: Stages, Agents, and Tinkering", Complexity, Vol. 3/No. 3, January/February 1998, 12-21.

  Understanding and explaining complexity across time and cultures.

  Douglas R. Hofstadter, "Computer Tournaments of the Prisoner's Dilemma Suggest How Cooperation Evolves", Scientific American, May 1983.

  Abstract: Hofstadter explains Robert Axelrod's computer tournaments, which explored the evolution of cooperation in the Iterated Prisoner's Dilemma. For the original work, including agent-based models, formal theorems, and many real-world applications, see Robert Axelrod, Evolution of Cooperation, Basic Books, New York, NY (pdf,Chapters 1,2,9).

  David M. Kreps, Game Theory and Economic Modelling, Clarendon Press, Oxford, 1991.

  Abstract: This book presents basic game theory tools, illustrated graphically and by numerous examples, and discusses the questions that these tools can and cannot answer.

  Martin A. Nowak, Karen M. Page, and Karl Sigmund, "Fairness Versus Reason in the Ultimatum Game", Science, Vol. 289, September 8, 2000, pp. 1773-1775. Published article freely available at The Science Magazine.

  Abstract: The authors consider the Ultimatum Gamein which two players are offered a chance to win a certain sum of money. One player, the proposer, gets to offer a portion of the sum to the other player, retaining the rest. The second player gets to accept or reject the offer, with rejection resulting in no money for either player. The rational solution, according to game theory, is for the proposer to offer as little as possible and for the other player to accept. When humans play the game, however, the most frequent offer is an equal ("fair") share. The authors employ evolutionary dynamics to explain how this "irrational" anchoring on fair shares might have evolved among humans in part through a rational concern for reputation. Specifically, accepting low offers, if generally known and remembered, increases the chances of receiving low offers in subsequent encounters; and making low offers becomes irrational if low offers are not accepted.

  Brian Skyrms, Evolution of the Social Contract, Cambridge University Press, 1996.

  Abstract: From the book cover: "In this pithy and highly readable book, Brian Skyrms, a recognized authority on game theory and decision theory, investigates traditional problems of the social contract in terms of evolutionary dynamics. Game theory is skillfully employed to offer quite new interpretations of a wide variety of social phenomena, including justice, mutual aid, commitment, convention, and meaning."

  H. Peyton Young, "Social Dynamics: Theory and Applications", in Leigh Tesfatsion and Kenneth L. Judd (editors), Handbook of Computational Economics, Vol. 2: Agent-Based Computational Economics, Handbooks in Economics Series, North-Holland/Elsevier, Amsterdam, 2006.

  Abstract: Agent-based models typically involve large numbers of interacting individuals with widely differing characteristics, rules of behavior, and sources of information. The dynamics of such systems can be extremely complex due to their high dimensionality. This chapter discusses a general method for rigorously analyzing the long-run behavior of such systems using the theory of large deviations in Markov chains. The theory highlights certain qualitative features that distinguish agent-based models from more conventional types of equilibrium analysis. Among these distinguishing features are: local conformity versus global diversity, punctuated equilibrium, and the persistence of particular states in the presence of random shocks. These ideas are illustrated through a variety of examples, including competition between technologies, models of sorting and segregation, and the evolution of contractual customs.

Software, Toolkits, and Demos

• Annotated list of pointers to ACE/CAS General Software and Toolkits

• Annotated list of pointers to ACE/CAS Computational Laboratories and Demonstration Software

• Chris Cook (Computer Science Department, Iowa State University, Ames) has developed the Axelrod Tournament, a computational laboratory that captures and extends the salient aspects of Axelrod's 1979 tournament. The Axelrod Tournament permits a user to specify as treatment factors the number of tournament iterations, the total number of agents (strategies) comprising the initial tournament population, the types of agents in this population, and the form of payoff matrix for each agent type. The latter feature extends Axelrod's original tournament by permitting matched agents to engage in a wide variety of two-player games (Chicken, Stag Hunt, etc.) depending on their specified types. The user can then observe the comparative performance over time of each agent, and each agent type, by means of run-time graphical and text displays. The Axelrod Tournament is available as freeware under the GNU Public License. Automatic installation software for this computational laboratory, together with more detailed information about its capabilities and implementation, can be obtained at The Axelrod Tournament: Demonstration Software (html).

• The Complexity of Cooperation Website provides software and documentation (as well as other resources) related to two books by Robert Axelrod: (a) The Complexity of Cooperation: Agent-Based Models of Competition and Collaboration, Princeton University Press, 1997; and (b) The Evolution of Cooperation, Basic Books, 1994.

• The University of Toronto maintains an interctive tutorial on the Evolution of Cooperation that uses the Prisoner's Dilemma game for concrete illustration.

• Leigh Tesfatsion (Iowa State University) and coauthors have developed the Trade Network Game (TNG) Laboratory for exploring the evolution of trade networks among strategically interacting traders. The TNG traders repeatedly choose and refuse their trade partners on the basis of expected payoffs, and trades are modeled as two-person games in which the traders can either "cooperate" or "defect". The TNG user can set trade payoffs to mimic a wide variety of game configurations (e.g., prisoner's dilemma, chicken, stag hunt,...). The TNG lab permits systematic experimentation to determine conditions under which the trade networks that evolve over time support cooperative behaviors among buyers and sellers (e.g., workers and employers).

Resource Sites, Groups, and Individual Researchers

• ACE/CAS Research Sites and Groups

• Individual Researchers using ACE/CAS Tools

• W. Brian Arthur, ( Santa Fe Institute, New Mexico): Designing economic agents that act like human agents; The El Farol Bar Problem; Artificial stock market modelling; Effects of positive feedbacks.

• Robert Axelrod (Political Science and Public Policy, School of Public Policy Studies, University of Michigan, Ann Arbor): Complexity of cooperation; Evolution of cooperation. Axelrod maintains a Complexity of Cooperation Web Site that provides software and documentation (as well as other resources) connected with two of his books: (a) The Complexity of Cooperation: Agent-Based Models of Competition and Collaboration, Princeton University Press, Fall 1997; and (b) The Evolution of Cooperation, Basic Books, 1994.

• Robert Axtell (Brookings Institution, Washington, D.C.): Sugarscape model; Growing artificial societies from the bottom up; Size distribution of firms; Environmental economics and regulation; Global change science and policy.

• Samuel Bowles (Santa Fe Institute, University of Sienna, and Emeritus Professor of Economics at the University of Massachusetts, Amherst, MA): Co-evolution of preferences, institutions, and behavior; Causes and consequences of economic inequality.

• Robert Boyd (Department of Anthropology, UCLA): Evolutionary psychology of mechanisms that give rise to, and shape, human culture; Population dynamic processes and human cultural variation.

• Rosaria Conte (CNR - Institute of Cognitive Sciences and Technology, Division of Artificial Intelligence Cognitive Modelling and Interaction, Institute of Psychology, National Research Council, Rome, Italy): Simulation of social behavior; External social sources of constraints to cognitive agents' autonomy; Formal models for representing and treating the mental attitudes involved in social action, social groups, and collective agents; Emergence of norms.

• Joshua M. Epstein (Brookings Institution, Washington, D.C.): Sugarscape; Growing societies from the bottom up; Modelling of complex social systems, with application to international security, environmental, and policy areas.

• Herbert Gintis (External Faculty Member of the Santa Fe Institute, and Emeritus Professor of Economics at the University of Massachusetts, Amherst) is interested in agent-based evolutionary game dynamics, the evolution of reciprocity, the moral economy of communities, and the evolution of social norms. He has developed Borland Pascal 7.0 code that implements a general iterated game of the following form. Agents in a population are randomly paired for game play and obtain fitness payoffs. A genetic algorithm involving haploid reproduction and mutation is then used to evolve the agent population.

• Joe Henrich (Anthropology, Emory University, Atlanta, Georgia): Biological evolution of cultural transmission and learning capacities; Evolution of cooperation; Common pool resource and public goods problems; Cross-cultural experimental games; Economic behavior and ethnography among the Mapuche of southern Chile.

• John M. Orbell (Political Science Department, University of Oregon, Eugene): Agent-based computational modelling of socioeconomic systems; Evolution of cooperation and trust; Coordination issues and social chess; Intersection of evolutionary theory, cognitive science, and the study of human social relations; Evolutionary psychology. Orbell has designed various real-agent experiments and written code to implement experiments with computational agents.

• Brian Skyrms (Logic, Philosophy of Science, and Economics, UC Irvine): Evolution of conventions and social contracts; Inductive logic; Decision theory; Rational deliberation; Metaphysics of logical atomism, causality, and Truth.

• Leigh Tesfatsion (Economics, Iowa State University) and co-authors have investigated the evolution of cooperation in iterated prisoner's dilemma games in which the players are able to choose and refuse their partners on the basis of continually updated partner preferences. This work was later extended by Tesfatsion to a more general "Trade Network Game (TNG)" framework consisting of buyers, sellers, and dealers who repeatedly seek preferred trade partners and whose trade interactions are modelled as two-person games. Source code for the TNG is available online as freeware (see above).

• Nick Vriend (Department of Economics, Queen Mary and Westfield College, University of London): Dynamics of interactive market processes; Emergent properties of evolving market structures and outcomes.

• H. Peyton Young (Department of Economics, Johns Hopkins University, Baltimore, Maryland): Individual strategy and social structure; Learning and evolution in games; Bargaining and negotiation; Public finance; Political representation and voting; Distributive justice.

Copyright © 2007 Leigh Tesfatsion. All Rights Reserved.