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Minority Games, Local Interactions, and Endogenous Networks

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Author Info
Giorgio Fagiolo ()
Marco Valente ()

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Abstract

We study a local version of the Minority Game, where agents are placed on the nodes of a directed graph. Agents care about being in the minority of the group of agents they are currently linked to and employ myopic best-reply rules to choose their next-period state. We show that, in this benchmark case, the smaller the size of local networks, the larger long-run population-average payoffs. We then explore the collective behavior of the system when agents can: (i) assign weights to each link they hold and modify them over time in response to payoff signals; (ii) delete badly performing links (i.e., opponents) and replace them with randomly chosen ones. Simulations suggest that, when agents are allowed to weigh links but cannot delete/replace them, the system self-organizes into networked clusters that attain very high payoff values. These clustered configurations are not stable and can easily be disrupted, generating huge subsequent payoff drops. If, however, agents can (and are sufficiently willing to) discard badly performing connections, the system quickly converges to stable states where all agents get the highest payoff, independently of the size of the networks initially in place. Copyright Springer Science + Business Media, Inc. 2005

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Publisher Info
Article provided by Springer in its journal Computational Economics.

Volume (Year): 25 (2005)
Issue (Month): 1 (February)
Pages: 41-57
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Handle: RePEc:kap:compec:v:25:y:2005:i:1:p:41-57

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Web page: http://www.springerlink.com/link.asp?id=100248

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Related research
Keywords: adaptive agents; endogenous networks; local interactions; minority games;

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References listed on IDEAS
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  1. Kirman, Alan P. & Vriend, Nicolaas J., 2001. "Evolving market structure: An ACE model of price dispersion and loyalty," Journal of Economic Dynamics and Control, Elsevier, vol. 25(3-4), pages 459-502, March. [Downloadable!] (restricted)
  2. Alan Kirman, 1997. "The economy as an evolving network," Journal of Evolutionary Economics, Springer, vol. 7(4), pages 339-353. [Downloadable!] (restricted)
  3. Page, Scott E., 1997. "On Incentives and Updating in Agent Based Models," Working Papers 1001, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  4. Matteo Marsili & Damien Challet, 2001. "Trading Behavior And Excess Volatility In Toy Markets," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 3-17. [Downloadable!] (restricted)
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  5. Giulio Bottazzi & Giovanna Devetag & Giovanni Dosi, 1999. "Adaptive Learning and Emergent Coordination in Minority Games," LEM Papers Series 1999/24, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy. [Downloadable!]
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  6. Blume Lawrence E., 1995. "The Statistical Mechanics of Best-Response Strategy Revision," Games and Economic Behavior, Elsevier, vol. 11(2), pages 111-145, November. [Downloadable!] (restricted)
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  7. Giorgio Fagiolo & Luigi Marengo & Marco Valente, . "Endogenous Networks in Random Population Games," Modeling, Computing, and Mastering Complexity 2003 05, Society for Computational Economics. [Downloadable!]
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  8. Page, Scott E, 1997. "On Incentives and Updating in Agent Based Models," Computational Economics, Springer, vol. 10(1), pages 67-87, February. [Downloadable!]
  9. Ochs, Jack, 1990. "The Coordination Problem in Decentralized Markets: An Experiment," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 545-59, May. [Downloadable!] (restricted)
  10. Fagiolo, Giorgio, 2005. "Endogenous neighborhood formation in a local coordination model with negative network externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 297-319, January. [Downloadable!] (restricted)
  11. Arthur, W Brian, 1994. "Inductive Reasoning and Bounded Rationality," American Economic Review, American Economic Association, vol. 84(2), pages 406-11, May. [Downloadable!] (restricted)
  12. Damien Challet & Matteo Marsili & Yi-Cheng Zhang, 1999. "Modeling Market Mechanism with Minority Game," Quantitative Finance Papers cond-mat/9909265, arXiv.org. [Downloadable!]
  13. Weisbuch, Gerard & Kirman, Alan & Herreiner, Dorothea, 2000. "Market Organisation and Trading Relationships," Economic Journal, Royal Economic Society, vol. 110(463), pages 411-36, April. [Downloadable!] (restricted)
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