Evolution of Agents in a Simple Artificial Market

Abstract

In this chapter, we conduct a comparative study of various traders following different trading strategies. We design an agent-based artificial stock market consisting of two opposing types of traders: “rational traders” (or “fundamentalists”) and “imitators” (or “chartists”). Rational traders trade by trying to optimize their short-term income. On the other hand, imitators trade by copying the majority behavior of rational traders. We obtain the wealth distribution for different fractions of rational traders and imitators. When rational traders are in the minority, they can come to dominate imitators in terms of accumulated wealth. On the other hand, when rational traders are in the majority and imitators are in the minority, imitators can come to dominate rational traders in terms of accumulated wealth. We show that survival in a finance market is a kind of minority game in behavioral types, rational traders and imitators. The coexistence of rational traders and imitators in different combinations may explain the market’s complex behavior as well as the success or failure of various trading strategies. We also show that successful rational traders are clustered into two groups: In one group traders always buy and their wealth is accumulated in stocks; in the other group they always sell and their wealth is accumulated in cash. However, successful imitators buy and sell coherently and their wealth is accumulated only in cash.