Computational Economics

, Volume 19, Issue 1, pp 5–23 | Cite as

Financial Markets can be at Sub-Optimal Equilibria

  • Shareen Joshi
  • Jeffrey Parker
  • Mark A. Bedau
Article

Abstract

We use game theory and Santa Fe Artificial Stock Market, anagent-based model of an evolving stock market, to study theoptimal frequency for traders to revise their market forecastingrules. We discover two things: There is a unique strategic Nashequilibrium in the game of choosing forecast revision rates, andthis equilibrium is sub-optimal in the sense that traders'earnings are not maximized an the market is inefficient. Thisstrategic equilibrium is due to an analogue of the prisoner'sdilemma; the optimal global state is unstable because eachtrader has too much incentive to `defect' and use forecastingrules that pull the market into thesub-optimal equilibrium.

finance efficiency Nash equilibrium game theory agent-based models prisoner's dilemma 

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Copyright information

© Kluwer Academic Publishers 2002

Authors and Affiliations

  • Shareen Joshi
    • 1
    • 2
  • Jeffrey Parker
    • 1
  • Mark A. Bedau
    • 2
  1. 1.Reed CollegePortlandU.S.A.
  2. 2.Santa Fe InstituteSanta FeU.S.A

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