Bounded strategic reasoning explains crisis emergence in multi-agent market games. Issue 2 (8th February 2023)

• Record Type: Journal Article
• Authors: Patrick Evans, Benjamin; Prokopenko, Mikhail
• Is Part Of: Royal Society open science. Volume 10:Issue 2(2023)
• Publication Date: 2023-02-08
• Subjects: complexity economics -- bounded rationality -- crisis emergence -- market entrance games -- multi-agent markets; Science -- Periodicals; 500
• DOI: 10.1098/rsos.221164
• Languages: English
• ISSNs: 2054-5703

Abstract

Abstract : The efficient market hypothesis (EMH), based on rational expectations and market equilibrium, is the dominant perspective for modelling economic markets. However, the most notable critique of the EMH is the inability to model periods of out-of-equilibrium dynamics without significant external news. When such dynamics emerge endogenously, the traditional economic frameworks prove insufficient. This work offers an alternate perspective explaining the endogenous emergence of punctuated out-of-equilibrium dynamics based on bounded rational agents. In a concise market entrance game, we show how boundedly rational strategic reasoning can lead to endogenously emerging crises, exhibiting fat tails in returns. We also show how other common stylized facts, such as clustered volatility, arise due to agent diversity (or lack thereof) and the varying learning updates across the agents. This work explains various stylized facts and crisis emergence in economic markets, in the absence of any external news, based on agent interactions and bounded rational reasoning.