ABSTRACT
In standard economic models agents only interact through the price system. In fact, the state that agents find themselves in depends on the states of the other agents in the economy. This chapter discusses economic models in which agents interact directly with each other but use relatively simple rules and learn from their experience. It suggests that the understanding of aggregate economic phenomena requires an understanding both of individual behavior and the way in which individuals interact. The chapter argues that it is important to consider economic models in which the "states" of individuals depend on the states of others. It describes a view of the economy as an interactive system in which agents, rather than fully optimizing, learn from experience. The chapter emphasizes the importance of models in which agents only interact with a limited subset of other agents, their neighbors. It also suggests that the neighborhood structure itself should be considered as endogenous.
