Introducing Social Investors into
Multi-Agent Models of Financial
Markets
Stephen Chen, Brenda Spotton Visano,
and Ying Kong
York University
What is a Social Investor?
Trend Investors


Buy when prices are going up
aka momentum investors, technical
analysts, noise investors
Social Investors

Buy when others are buying
June 28, 2006
IEA-AIE 2006
What is the Role of Social Investors?
What happens during a mania or market
bubble?

“Irrational Exuberance”
Market bubbles tend to coincide with
increases in market participation
June 28, 2006
IEA-AIE 2006
Why use a Multi-Agent Model?
Capture the dynamics of the event
Model a larger number of actors and
interactions

Mathematical intractability
Test intervention strategies
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Existing Models of Financial Crises
Financial instability (Banking crises)

Game theory models of discrete time
events – e.g. coordination failure
Market bubbles and crashes

Mostly qualitative analysis – e.g. socioeconomic factors, new technology, new
market mechanisms, etc
June 28, 2006
IEA-AIE 2006
Existing Multi-Agent Models
Developed to model distributions of price
changes  “fat tails”
Models have two investor types

Fundamental and Noise/Trend
Models focus on communication
processes
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Game Theory
Actors each have a
choice, and the
reward of each
choice depends on
the action of the
other actor
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Coop
Defect
Coop
+1, +1 -10, +5
Defect
+5, -10
-5, -5
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Nash Equilibria
First actor makes a decision, second actor
picks optimal decision based on first
actor’s decision, first actor’s optimal
decision is the original decision
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Example of Nash Equilibrium


Actor 1 Cooperates
Actor 2 Defects



Defect
+5 benefit vs. +1
Actor 1 Defects

Coop
-5 benefit vs. -10
Coop
+1, +1 -10, +5
Defect
+5, -10
Actor 2 still Defects

Nash Equilibrium
June 28, 2006
-5, -5
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Game Theory behind Multi-Agent
Model
Two actors – Fundamental and Trend




Fundamental buying causes price to go up
Trend buying because price is going up
Fundamental selling because price is too
high
Trend selling because price is going down
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Game Theory behind Multi-Agent
Model II
Two actors – Informed and Social



Informed buying causes prices to go up
Social buying because others are buying
causes prices to keep going up
Informed keep buying because prices are
going up
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Model Results
10000
8000
Price
6000
4000
2000
0
Time
Only two states – overly sinusoidal price trends
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Current Results
140
120
100
80
60
40
20
0
0
250
500
750
1000
1250
1500
1750
Actors: Fundamental, Trend, and Social
No Nash equilibrium
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Summary
Existing (theoretical) tools are not
suitable for the modelling of all
economic phenomena
Easy to model stable or unstable systems,
but hard to model semi-stable systems
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Future Work
Sensitivity testing – analysis of key
factors between stable and unstable
systems
Interventions strategies – attempts to
ameliorate a market bubble in “real
time”
June 28, 2006
IEA-AIE 2006