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 |
| State | Published - 1999 |
| Externally published | Yes |
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Keywords
- Bounded rationality
- Competitive market
- Evolutionary dynamics
- Microstructure
- Strategies
- Trading
ASJC Scopus subject areas
- General
Cite this
Self-organized segregation of traders within a market. / Johnson, Neil F; Hui, P. M.; Lo, T. S.
In: Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences, Vol. 357, No. 1758, 1999, p. 2013-2018.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Self-organized segregation of traders within a market
AU - Johnson, Neil F
AU - Hui, P. M.
AU - Lo, T. S.
PY - 1999
Y1 - 1999
N2 - 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.
AB - 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.
KW - Bounded rationality
KW - Competitive market
KW - Evolutionary dynamics
KW - Microstructure
KW - Strategies
KW - Trading
UR - http://www.scopus.com/inward/record.url?scp=0346968439&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=0346968439&partnerID=8YFLogxK
M3 - Article
AN - SCOPUS:0346968439
VL - 357
SP - 2013
EP - 2018
JO - Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences
JF - Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences
SN - 0962-8428
IS - 1758
ER -