Evolution of the agents knowledge

From the agent's point of view, the economic system is evolving over a personal, subjective timescale. Subjective time is less homogenous than physical time, since it is concentrated around the present time and its reference point is mobile. As concerns past events, they are integrated into the agent's memory. It is frequently stated that there exists a discount rate such that events are considered less and less as their distance in the past increases. For instance, a consumer values his most recent experiences of a good more than his older experiences. As concerns future events, they are integrated into his prospective mind. Again, it is said that there exists a discount rate such that expected events are considered less and less as their distance in the future increases. For instance, a firm considers more the short-term than the long-term effects of a certain investment.

An agent receives newinformation through different channels, about different variables and at different times. He experiments passively wheninformation is just a by-product of his actions, for instance when he observes another's past purchases or when he experiences the satisfaction induced by a newly-tested good. He experiments actively when he performs specific operations with the aim of obtaining information. For instance, a consumer visits various different shops to compare the prices of a good he wants to buy. As usual, he may trade off between exploration for newinformation and exploitation of existinginformation, even if the trade-off is not optimal. As another example, a producer may vary the price of his product through successive adjustments in order to learn the demand function he faces.

An agent modifies his structural knowledge at short term by using belief revision rules. He may simply adjust the parameters of a model of his environment in keeping with his observations. For instance, a consumer may discover the quality of a good for food by observing the demand of another consumer who knows the quality. However, he may hold his theories for a long time before observing that they are refuted. For instance, a consumer may believe for years that the price of some high technology good is regularly decreasing before he observes

8.2 Evolution of the agent's knowledge 153

he is wrong. More profoundly, an agent may define a model of his environment by means of abductive reasoning from data. For instance, a firm may discover the behavior function of some other producer in order to adapt or even to imitate him. Of course, the revealing process is still ambiguous and strategic considerations are involved in it. For instance, if a firm learns that its opponent is employing more workers in a depressed economic climate, it then has to interpret such behavior.

Finally, an agent modifies his expectations by changing his expectation rules. An expectation rule may be based on a more or less crude model of his environment. For instance, a firm forecasts the future price of oil by means of a sector-based model simulating an equilibrium between supply and demand. Due to bounded rationality, the expectation rule may directly relate the expected variable to its past values. For instance, a consumer predicts future prices by means of an adaptive rule, stated in order to reduce the forecasting error. In general, several rules are used simultaneously by different agents to forecast the same variable. For instance, on a financial market, if 'fundamentalists' predict the future price of an asset with reference to its future returns, 'chartists' use rules based on regularities observed in the past.

The agents consider that the evolution process obeys the same types of laws or models as the modeler does. However, the agent is induced to distort or simplify certain explanative schemes. Firstly, he is 'egocentric' in that he attributes any change to himself, to nearby agents or to their common context. For instance, a producer considers that a new technology has been obtained by his own research, by neighboring firms or by academic laboratories which are out of his control. Secondly, he is 'myopic' in that he considers that the slow variables are fixed and that only the fast variables are evolving. For instance, a consumer considers that the prices he observes are exogenous even if he knows that he has some (small) influence on them. In particular, an agent generally considers emergent phenomena as natural phenomena that he cannot influence.

Globally, like his material capital, an agent's immaterial capital evolves in different ways. Firstly, knowledge is increased by incorporating successive pieces ofinformation into it. For an individual, immaterial capital develops through education or training, while for a firm, immaterial capital develops through research and development or in-house training. Secondly, knowledge is enriched by the autonomous internal reasoning performed on it. For an individual, knowledge is transformed by deduction or induction processes; for a firm, knowledge is transformed by redesigning its organization scheme. Thirdly, knowledge can shrink through some kind of cognitive obsolescence. For an individual, knowledge disappears through memory failure; for a firm, knowledge disappears through the loss of skilled agents or the inaccessibility of artificial memories.

In the employer-employee example, over the medium term, their information is modified by deliberate search. The employer looks for new workers prepared to work in the existing jobs for lower wages. The employee looks for jobs outside the firm for which he would be better paid. Each agent conducts his search in a neighborhood and may even limit his search to a sample of that neighborhood. In doing so, he faces relatively high search costs. Over the long term, informational or mediation devices may appear. For instance, employment agencies may be created to diffuseinformation about available jobs and so favor the adjustment of supply and demand.

Home Business Training Guide

Home Business Training Guide

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