Ants, Traders, and Fat Tails: An Application of the Kirman (1993) Model

Abstract

If you put two mounds of sugar with identical conditions near an ants’ nest, which one will the ants congregate at? Kirman explained the process of ant social herding using a simple model, and he conducted an interesting simulation. The fat tail distribution in the security market is well known, but its causes have not been sufficiently clarified. As an extension of the research of Kirman, Nirei and Watanabe tried to connect the fat tail distribution to microeconomic foundations, but there are many strong assumptions that are indispensable to the model such as the monotone likelihood ratio property (MLRP), risk neutrality, a demand curve that bends to the upper right, and an automatic supply; furthermore, the theoretical structure of the model is extremely complex. In this paper, by establishing a simple security market model and by applying the model of Kirman, the fat tail observed for price fluctuations is reproduced. Identical to Kirman and Nirei and Watanabe, the beauty contest of Keynes is kept in mind, and it is shown that a cause of the fat tail is the balance between independence and interdependence of the economic agents.