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Probabilistic economics is based on the most well-known concept of economic theory, namely the concept of S&D. In its most general form, this concept is formulated in probabilistic economics as follows: all the main things that happen in the market depend on some specific balance of supply and demand, determined on the basis of decisions made and openly presented in the form of market orders or market quotations to buy or sell a certain amount of an asset at a certain price. And only what is determined in the market by supply and demand, expressed in this form, is the subject of the study of probabilistic economics. In this sense it can also be called S&D economic theory, and the S&D principle itself is the main element of its basis.
This is generally the most important concept, or paradigm, in respect of the markets. Here it is: every market consists of market agents, buyers and sellers, interacting quite intensively, and prone not only to competition, but also to mutually beneficial social cooperation. There are no other market forces in markets, except the forces of market agents’ interaction. All market results are a consequence of the market agents’ actions, even if their actions were strongly influenced by other factors: the state, institutions, etc. Everything that happens in markets is done by interacting market agents and therefore only agent-based models (agent action-based models or below simply action-based models) can provide a reasonable and reliable quantitative basis for any modern economic theory. And the actions of market agents in the market are exactly the issuing of bids or quotations to buy or sell, which was discussed above.
Markets are never completely closed or free. All market agents are constantly influenced not only by other agents, but also by numerous external forces and factors. These external forces and factors, playing the role of boundary conditions, give economic systems harmony, integrity and stability. The most important of these are, of course, institutions of various kinds, such as the state, trade unions, laws, i
Modern markets are complex non-linear nonequilibrium dynamic systems, since all market agents are in constant interaction with each other and external forces, in other words, in constant motion in search of profitable co
In relatively free markets, buyers and sellers consciously and deliberately enter into trade deals with each other, because they enter into transactions only on mutually beneficial terms. It is not necessarily the case that they will seek to maximize their profits in every deal they make, since they understand that deals can only be mutually beneficial. But they try, usually, to increase their financial benefit by entering into as many of these mutually beneficial transactions as possible. Thus, it can be argued that the market as a whole seeks to maximize the trade volume, and moreover, to do it in monetary terms, as agents naturally seek, in the end, to increase their personal profits expressed in terms of money. This principle triggers the market process and the action of the laws of supply and demand. But the role of the state should also be taken into account, since it is present in the market as a full-fledged market agent and because, due to its enormous resources, it can, figuratively speaking, play not only the part of the first violin, but also the role of the conductor in this orchestra. Consequently, market dynamics can be approximated by applying the trade volume maximization principle to the market as a whole. Due to the fact that at present we do not have a developed mathematical body to use the more general principle of least action and the corresponding Lagrange equations of motion, the trade volume maximization still remains the only tool in this theory that helps to evaluate at least short-term trends in market dynamics.
Uncertainty and probability always accompany human action in the markets, therefore without taking them into account it is impossible to operate successfully for a sufficiently long period of time. This is caused by the very nature of human reasoning and the fundamental human inability to accurately predict the future state of markets. Moreover, according to the institutional and environmental principle, markets are constantly under the influence of various institutions and environmental factors. For these reasons, all market agent decisions and actions, and hence all market processes and phenomena, are essentially probabilistic, so they can only be adequately described by applying probabilistic mathematical methods and models. On the same grounds, demand and supply functions should also be described in terms of probability distributions.
To introduce some certainty, let us note that the first five principles, along with the axiom, constitute the basis for building a market model in which probabilistic effects are absent or not explicitly considered. We will call such a model classical because of its certain similarity to concepts of both classical economic theory and classical mechanics. Adding the sixth principle (the uncertainty and probability principle) to this base provides a basis for building a full-fledged probabilistic theory, which is naturally broader in nature and has much greater opportunities for further development. Obviously, from the methodological point of view, the classical model can be considered as a fairly good initial approximation of the probabilistic theory, which makes it possible to quantify the probabilistic effects by comparing the results of classical and probabilistic calculations. As a matter of fact, this exact possibility is the justification for building and using the classical model.
We believe that these six general principles can serve as a good basis to describe fully and adequately enough the main structural and dynamic properties of market economic systems and market processes in them. These principles and their rationale will be further discussed in more detail on several occasions. And the accuracy of the probabilistic economics built in this way and the limits of its applicability should and will, naturally, be determined in this study by comparing the results of calculations carried out using the numerical methods of this theory with the corresponding experimental data.