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

DOI10.1016/J.CHAOS.2016.03.011zbMATH Open1410.91340arXiv1601.02990OpenAlexW2232848979MaRDI QIDQ508310FDOQ508310

Serge Galam

Publication date: 10 February 2017

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

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.

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)

Cites Work

• Title not available (Why is that?)
• Self-fulfilling prophecies
• SOCIOPHYSICS: A REVIEW OF GALAM MODELS
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Cited In (4)

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

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