IDEAS home Printed from https://ideas.repec.org/a/spr/eurphb/v60y2007i3p369-384.html
   My bibliography  Save this article

”Illusion of control” in Time-Horizon Minority and Parrondo Games

Author

Listed:
  • J. B. Satinover
  • D. Sornette

Abstract

Human beings like to believe they are in control of their destiny. This ubiquitous trait seems to increase motivation and persistence, and is probably evolutionarily adaptive [J.D. Taylor, S.E. Brown, Psych. Bull. 103, 193 (1988); A. Bandura, Self-efficacy: the exercise of control (WH Freeman, New York, 1997)]. But how good really is our ability to control? How successful is our track record in these areas? There is little understanding of when and under what circumstances we may over-estimate [E. Langer, J. Pers. Soc. Psych. 7, 185 (1975)] or even lose our ability to control and optimize outcomes, especially when they are the result of aggregations of individual optimization processes. Here, we demonstrate analytically using the theory of Markov Chains and by numerical simulations in two classes of games, the Time-Horizon Minority Game [M.L. Hart, P. Jefferies, N.F. Johnson, Phys. A 311, 275 (2002)] and the Parrondo Game [J.M.R. Parrondo, G.P. Harmer, D. Abbott, Phys. Rev. Lett. 85, 5226 (2000); J.M.R. Parrondo, How to cheat a bad mathematician (ISI, Italy, 1996)], that agents who optimize their strategy based on past information may actually perform worse than non-optimizing agents. In other words, low-entropy (more informative) strategies under-perform high-entropy (or random) strategies. This provides a precise definition of the “illusion of control” in certain set-ups a priori defined to emphasize the importance of optimization. Copyright EDP Sciences/Società Italiana di Fisica/Springer-Verlag 2007

Suggested Citation

  • J. B. Satinover & D. Sornette, 2007. "”Illusion of control” in Time-Horizon Minority and Parrondo Games," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 60(3), pages 369-384, December.
    • Handle: RePEc:spr:eurphb:v:60:y:2007:i:3:p:369-384
    DOI: 10.1140/epjb/e2007-00353-6
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1140/epjb/e2007-00353-6
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1140/epjb/e2007-00353-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Robert J. Shiller, 1992. "Market Volatility," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691515, December.
    2. Huber, Jurgen & Kirchler, Michael & Sutter, Matthias, 2008. "Is more information always better: Experimental financial markets with cumulative information," Journal of Economic Behavior & Organization, Elsevier, vol. 65(1), pages 86-104, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wei-Xing Zhou & Guo-Hua Mu & Si-Wei Chen & Didier Sornette, "undated". "Strategies used as Spectroscopy of Financial Markets Reveal New Stylized Facts," Working Papers ETH-RC-11-005, ETH Zurich, Chair of Systems Design.
    2. Piekunko-Mantiuk Iwona, 2019. "Parameterized Trade on the Futures Market on the WIG20," Folia Oeconomica Stetinensia, Sciendo, vol. 19(1), pages 114-125, June.
    3. Stefan Kerbl, 2010. "Regulatory Medicine Against Financial Market Instability: What Helps And What Hurts?," Papers 1011.6284, arXiv.org, revised Nov 2010.
    4. Anirban Chakraborti & Ioane Muni Toke & Marco Patriarca & Frédéric Abergel, 2011. "Econophysics review: II. Agent-based models," Post-Print hal-00621059, HAL.
    5. Alessio Emanuele Biondo & Alessandro Pluchino & Andrea Rapisarda, 2012. "The beneficial role of random strategies in social and financial systems," Papers 1209.5881, arXiv.org, revised Jan 2013.
    6. Satinover, J.B. & Sornette, D., 2007. "Illusion of control in a Brownian game," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 386(1), pages 339-344.
    7. Didier SORNETTE, 2014. "Physics and Financial Economics (1776-2014): Puzzles, Ising and Agent-Based Models," Swiss Finance Institute Research Paper Series 14-25, Swiss Finance Institute.
    8. Hardik Rajpal & Deepak Dhar, 2018. "Achieving Perfect Coordination amongst Agents in the Co-Action Minority Game," Games, MDPI, vol. 9(2), pages 1-13, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mohamed CHIKHI & Claude DIEBOLT, 2022. "Testing the weak form efficiency of the French ETF market with the LSTAR-ANLSTGARCH approach using a semiparametric estimation," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 13, pages 228-253, June.
    2. Stefan Palan & Jürgen Huber & Larissa Senninger, 2020. "Aggregation mechanisms for crowd predictions," Experimental Economics, Springer;Economic Science Association, vol. 23(3), pages 788-814, September.
    3. Taylor Jaworski & Erik O. Kimbrough, 2016. "Bubbles, Crashes, And Endogenous Uncertainty In Linked Asset And Product Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(1), pages 155-176, February.
    4. Asaf Bernstein & Eric Hughson & Marc D. Weidenmier, 2008. "Can a Lender of Last Resort Stabilize Financial Markets? Lessons from the Founding of the Fed," NBER Working Papers 14422, National Bureau of Economic Research, Inc.
    5. Michael Kirchler, 2008. "It is hard to beat the Monkeys - On the Value of Asymmetric Fundamental Information in Asset Markets," Working Papers 2008-19, Faculty of Economics and Statistics, Universität Innsbruck.
    6. Giovanni Ferri & Andrea Morone, 2014. "The effect of rating agencies on herd behaviour," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 9(1), pages 107-127, April.
    7. Thomas Stöckl & Michael Kirchler, 2010. "Trading strategies and trading profits in experimental asset markets with cumulative information," Working Papers 2010-09, Faculty of Economics and Statistics, Universität Innsbruck.
    8. Pope, Rulon D. & LaFrance, Jeffrey T. & Just, Richard E., 2011. "Agricultural arbitrage and risk preferences," Journal of Econometrics, Elsevier, vol. 162(1), pages 35-43, May.
    9. Bradley Jones, 2015. "Asset Bubbles: Re-thinking Policy for the Age of Asset Management," IMF Working Papers 2015/027, International Monetary Fund.
    10. Hidetoshi Yamaji & Masatoshi Gotoh & Yoshinori Yamakawa, 2016. "Additional Information Increases Uncertainty in the Securities Market: Using both Laboratory and fMRI Experiments," Computational Economics, Springer;Society for Computational Economics, vol. 48(3), pages 425-451, October.
    11. Oliver Gloede & Lukas Menkhoff, 2014. "Financial Professionals' Overconfidence: Is It Experience, Function, or Attitude?," European Financial Management, European Financial Management Association, vol. 20(2), pages 236-269, March.
    12. Jozef Barunik & Zdenek Drabek & Matej Nevrla, 2020. "Investment Disputes and Abnormal Volatility of Stocks," Papers 2006.10505, arXiv.org.
    13. Hauser, Florian & Schredelseker, Klaus, 2018. "Who benefits from insider regulation?," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 203-210.
    14. Eric M. Aldrich & Kristian López Vargas, 2020. "Experiments in high-frequency trading: comparing two market institutions," Experimental Economics, Springer;Economic Science Association, vol. 23(2), pages 322-352, June.
    15. Barreda Tarrazona, Iván J. & Grimalda, Gianluca & Morone, Andrea & Nuzzo, Simone & Teglio, Andrea, 2017. "Centralizing information improves market efficiency more than increasing information: Results from experimental asset markets," Kiel Working Papers 2072, Kiel Institute for the World Economy (IfW Kiel).
    16. Rocco Caferra & Simone Nuzzo & Andrea Morone, 2023. "“Less is more” or “more is better”? The effect of asymmetric information distribution on market efficiency and wealth inequality," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(2), pages 233-250, April.
    17. Francesco Tajani & Pierluigi Morano & Maria Paz Saez-Perez & Felicia Di Liddo & Marco Locurcio, 2019. "Multivariate Dynamic Analysis and Forecasting Models of Future Property Bubbles: Empirical Applications to the Housing Markets of Spanish Metropolitan Cities," Sustainability, MDPI, vol. 11(13), pages 1-21, June.
    18. James Crotty, 2011. "The Realism of Assumptions Does Matter: Why Keynes-Minsky Theory Must Replace Efficient Market Theory as the Guide to Financial Regulation Policy," UMASS Amherst Economics Working Papers 2011-05, University of Massachusetts Amherst, Department of Economics.
    19. Merl, Robert, 2022. "Literature review of experimental asset markets with insiders," Journal of Behavioral and Experimental Finance, Elsevier, vol. 33(C).
    20. Qi Nan Zhai, 2015. "Asset Pricing Under Ambiguity and Heterogeneity," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 16, July-Dece.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:eurphb:v:60:y:2007:i:3:p:369-384. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.