The invisible hand and the rational agent are behind bubbles and crashes

DOI10.1016/J.CHAOS.2016.03.011MaRDI QIDQ508310zbMATH OpenOpenAlexFDO

Authors Serge Galam

Publication date 10 February 2017

Published in Chaos, Solitons and Fractals (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1601.02990

zbMATH Keywords

rational agentbubblessociophysicschoice dynamicscrashesinvisible hand

Mathematics Subject Classification ID

Social networks; opinion dynamics (91D30) Economic growth models (91B62) Actuarial science and mathematical finance (91G99)

Abstract: The substantial turmoil created by both 2000 dot-com crash and 2008 subprime crisis has fueled the belief that the two classical paradigms of economics, which are the invisible hand and the rational agent, are not appropriate to describe market dynamics and should be abandoned at the benefit of alternative new theoretical concepts. At odd with such a view, using a simple model of choice dynamics from sociophysics, the invisible hand and the rational agent paradigms are given a new legitimacy. Indeed, it is sufficient to introduce the holding of a few intermediate mini market aggregations by agents sharing their own private information, to recenter the invisible hand and the rational agent at the heart of market self regulation including the making of bubbles and their subsequent crashes. In so doing, an elasticity is discovered in the market efficiency mechanism due to the existence of agents anticipation. This elasticity is found to create spontaneous bubbles, which are rationally founded, and at the same time, it provokes crashes when the limit of elasticity is reached. Although the findings disclose a path to put an end to the bubble-crash phenomena, it is argued to be rationality not feasible.

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Cites work

• scientific article; zbMATH DE number 1269502 (Why is no real title available?)
• A THRESHOLD MODEL FOR STOCK RETURN VOLATILITY AND TRADING VOLUME
• Modelling and measuring the irrational behaviour of agents in financial markets: discovering the psychological soliton
• SOCIOPHYSICS: A REVIEW OF GALAM MODELS
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Cited in

(4)

• Empirical analysis and agent-based modeling of the Lithuanian parliamentary elections
• Compartmental voter model
• Stochastic model of financial markets reproducing scaling and memory in volatility return intervals
• Complexity in quantitative finance and economics

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