Whom or What Does the Representative Individual Represent?

Abstract

A modern economy presents a picture of millions of people, either as individuals or organized into groups and firms, each pursuing their own disparate interests in a rather limited part of the environment. Somehow, these varied individual activities are more or less coordinated and some relative order emerges. Economists commonly explain that this is due to Adam Smith's "invisible hand," and that despite the conflicting interests of individuals, the result of the pursuit of their selfish ends is socially satisfactory. The market provides the mechanism which links and coordinates all the activities being pursued by individuals.Paradoxically, the sort of macroeconomic models which claim to give a picture of economic reality (albeit a simplified picture) have almost no activity which needs such coordination. This is because typically they assume that the choices of all the diverse agents in one sector-consumers for example-can be considered as the choices of one "representative" standard utility maximizing individual whose choices coincide with the aggregate choices of the heterogeneous individuals.My basic point in this paper is to explain that this reduction of the behavior of a group of heterogeneous agents even if they are all themselves utility maximizers,is not simply an analytical convenience as often explained, but is both unjustified and leads to conclusions which are usually misleading and often wrong. Why is this? First, such models are particularly ill-suited to studying macroeco-

In order to stand up you must keep cycling: Change and coordination in complex evolving economies

“…The absence of any explicit coordination process in the latter models is discussed in Kirman, (1992), in his devastating critique of the representative agent (RA):…”

“…This is because typically they assume that the choices of all the diverse agents in one sector-consumers for example-can be considered as the choices of one "representative" standard utility maximizing individual whose choices coincide with the aggregate choices of the heterogeneous individuals. [Kirman, (1992), p. 117] According to Kirman, (1992), the RA apparatus is not simply unrealistic but wrong because not well-suited to study problems of emergence and particularly of lack of coordination like unemployment, income inequality, and in general aggregate demand externalities. Related, intrinsic, theoretical flaws of the representative agent concern (i) the symmetry of behaviour between individual and collective rationality; (ii) the reaction of the RA to policy changes maybe fairly different from the aggregate reaction of the individuals; (iii) the ordered of choices of the RA may not guarantee the individual preference ranking orders; (vi) whenever one does hypothesis testing, trying to compare the model with the data, the modeller does not know if, in case of rejection, has to reject specifically the RA or some other behavioural hypotheses.…”

Agent-based modeling in managerial science: an illustrative survey and study

“…Agents may show differences with respect to several dimensions such as knowledge, objectives, rules for the formation of expectations, decision rules or information processing capabilities. 1 Thus, in ABM agents are reflected in their diversity (Kirman 1992;Hommes 2006;Epstein 2006a;Axtell 2007) rather than relying on a representative agent, i.e. the ''representative'' individual that, when maximizing utility, chooses the same options as the aggregate choice of the heterogeneous population of individuals as often employed in economic models (Kirman 1992).…”

“…1 Thus, in ABM agents are reflected in their diversity (Kirman 1992;Hommes 2006;Epstein 2006a;Axtell 2007) rather than relying on a representative agent, i.e. the ''representative'' individual that, when maximizing utility, chooses the same options as the aggregate choice of the heterogeneous population of individuals as often employed in economic models (Kirman 1992). According to Stirling (2007), ''diversity'' or heterogeneity of agents could show up in three dimensions, i.e.…”

Social Identity Strategies in Recent Economics

“…Kirman has emphasized this connection, and argued that individuals may be better conceptualized as directly interacting with one another in social contexts rather than indirectly through markets (Kirman, 1992(Kirman, , 1997cf. Davis, 2005).…”