Abstract
Abstract The author studies the evolution of the number of coexisting beliefs in a financial market. Crucially, he undertakes to do so in a framework where the paradigms, beliefs, and models driving agents behavior are left totally unspecified; i.e., the author does not make any parametric or non-parametric model assumptions. The overreaching aim of this exercise is to characterise the dynamic of the variety of beliefs in an auction-based financial market independently of any assumptions on agents behaviors. The resulting framework may be seen as an abstract agent-based model. In a computer experiment the authors exhibits a cycle between two states, so that either all agents act according to the same belief, or there is no leading belief; i.e., there is one dominating belief, or none. Further, the author finds that the frequency of this cycle is positively linked to the quality of the information available to the agents.
Highlights
We provide an assumption free framework to study the fundamental dynamic of the heterogeneity of beliefs in financial market
As in a real financial market, agents are allowed to interact with each other and the market structure, allowing for experiments to be performed, and phenomenon of interest observed. The finality of this process is that, assuming that the constructed copy is a satisfying replicate of a real financial market, we can draw inference on how events occur in real markets
More to the point, changing the probability does not change the overall dynamic of paradigm shifts; e.g., having agents keep a record of the paradigm that failed to perform and under select them, or vary the value of p2 to large values (∼ 0.25), does not appear in our simulations to affect the reported dynamic
Summary
We provide an assumption free framework to study the fundamental dynamic of the heterogeneity of beliefs in financial market. From a general abstract perspective, the heuristic of agent based modeling is to first create a copy of a financial market, and to expriment on this copy to infer properties of a real financial market. As in a real financial market, agents are allowed to interact with each other and the market structure, allowing for experiments to be performed, and phenomenon of interest observed. The finality of this process is that, assuming that the constructed copy is a satisfying replicate of a real financial market, we can draw inference on how events occur in real markets. Our view is that as few assumptions or parametric restrictions should be made on this regard as they might be violated by unforeseen behavior and motivations on the part of the agents (Shiller, 1999)
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