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Humans, Robots and Market Crashes: A Laboratory Study ∗

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  • Feldman, Todd
  • Friedman, Daniel

Abstract

We introduce human traders into an agent based ï¬nancial market simulation prone to bubbles and crashes. We ï¬nd that human traders earn lower proï¬ts overall than do the simulated agents (“robotsâ€) but earn higher proï¬ts in the most crash-intensive periods. Inexperienced human traders tend to destabilize the smaller (10 trader) mar- kets, but otherwise they have little impact on bubbles and crashes in larger (30 trader) markets and when they are more experienced. Humans’ buying and selling choices respond to the payoff gradient in a manner similar to the robot algorithm. Likewise, following losses, humans’ choices shift towards faster selling. There are problems in properly identifying fundamentalist and trend-following strategies in our data.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt4kf382p6.

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Date of creation: 07 Oct 2008
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Handle: RePEc:cdl:ucscec:qt4kf382p6

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Keywords: Financial markets; agent-based models; experimental economics;

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  1. Duffy, John, 2006. "Agent-Based Models and Human Subject Experiments," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 19, pages 949-1011 Elsevier.
  2. J. Doyne Farmer, 2002. "Market force, ecology and evolution," Industrial and Corporate Change, Oxford University Press, vol. 11(5), pages 895-953, November.
  3. Axelrod, Robert & Tesfatsion, Leigh, 2006. "A Guide for Newcomers to Agent-Based Modeling in the Social Sciences," Staff General Research Papers 12515, Iowa State University, Department of Economics.
  4. Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, vol. 3(3), pages 257-275, June.
  5. Boswijk, H.P. & Hommes C.H. & Manzan, S., 2005. "Behavioral Heterogeneity in Stock Prices," CeNDEF Working Papers 05-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  6. John Duffy & M. Ünver, 2006. "Asset price bubbles and crashes with near-zero-intelligence traders," Economic Theory, Springer, vol. 27(3), pages 537-563, 04.
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