Self-organized segregation of traders within a market

N. F. Johnson; P. M. Hui; T. S. Lo

doi:10.1098/rsta.1999.0413

Self-organized segregation of traders within a market

N. F. Johnson, P. M. Hui, T. S. Lo

Physics

Research output: Contribution to journal › Article › peer-review

3 Scopus citations

Abstract

We study a simple competitive market, in which individual traders adapt their trading strategies according to past experience. Because of the limited knowledge available to them, they are forced to make decisions based on inductive, rather than deductive, thinking. We show that a population of competing traders with similar capabilities and knowledge will tend to self-segregate into opposing groups characterized by extreme behaviour. To be successful, a trader should behave in an extreme way, by either always copying or rejecting past trends in the market's history. Cautious traders tend to perform poorly.

Original language	English (US)
Pages (from-to)	2013-2018
Number of pages	6
Journal	Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences
Volume	357
Issue number	1758
DOIs	https://doi.org/10.1098/rsta.1999.0413
State	Published - Jan 1 1999

Keywords

Bounded rationality
Competitive market
Evolutionary dynamics
Microstructure
Strategies
Trading

ASJC Scopus subject areas

Mathematics(all)
Engineering(all)
Physics and Astronomy(all)

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10.1098/rsta.1999.0413

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KW - Evolutionary dynamics

KW - Microstructure

KW - Strategies

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Self-organized segregation of traders within a market

Abstract

Keywords

ASJC Scopus subject areas

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