Just Don’t Do It
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Just Don’t Do It. Minority Games and the Stock Market. To start the ball rolling…we go back to where it all began. Comparisons with P Beauty Contest If we assume rationality (game theorists playing), perfect information, we can derive a dominant strategy “0” - PowerPoint PPT Presentation
Transcript of Just Don’t Do It
Just Don’t Do It
Minority Games and the Stock Market
To start the ball rolling…we go back to where it all beganComparisons with P Beauty Contest
If we assume rationality (game theorists playing), perfect information, we can derive a dominant strategy “0”
No matter what our assumptions, any dominant strategy would always fail in a minority game
Some features of MG
Negative feedback Market entry games
Phase transitionsAs z increases…
Other propertiesFrustration…spin glasses
Individual heterogeneity
Collective coordination…collusion?
Efficient market hypothesis
No arbitrage hypothesis
Random walk prices
Stock markets basics
Who puts information in prices?
If markets are unpredictable, why are people wasting their time?
Prices over the short term do not follow random walks
Stock markets basics??
When there are fewer sellers than buyers, prices go up, sellers profit.
When there are fewer buyers than sellers….
Gi(t)=-ai(t)*A(t)
Minority always wins…???
Stock markets and MG
Assume at t-1/2, agent thinks that p(t) > p(t+1)What should the agent do?Place sell order
Again if p(t) < p(t+1)Place buy order
Agent gain/loss isGi
$(t+1/2)=ai(t-1/2)*A(t+1/2)
The $ Game
The $ game with a Market Maker
R(t) = A(t)-SM(t)/
Market Maker provides clearing mechanism
The $ Game
Low values of m, lesser strategies
Coordination to only buy or only sell
Arbitrage the market maker
Positive feedback
Non ideal/boom scenarios…finally limited.
The $ Game
High values of m, too many strategies
Curse of intelligence
Market maker arbitrages agents as a group.
Some agents with non equilibrium strategies still manage to profit.
The $ Game
MGs have a small contribution to self organization of markets
Driving force among agents is to make money and not be in the minority
Best strategy is to shift opportunistically
The $ Game Conclusions
Thank You
