The reality game

DOI10.1016/J.JEDC.2009.02.002MaRDI QIDQ2270564zbMATH OpenOpenAlexFDO

Authors Dmitriy Cherkashin, J. Doyne Farmer, Seth Lloyd

Publication date 28 July 2009

Published in Journal of Economic Dynamics and Control (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/0902.0100

zbMATH Keywords

arbitragebeauty contestsevolutionary gamesfinancial marketsinformation theorymarket efficiencymarket reflexivitynoise trader models

Mathematics Subject Classification ID

Stochastic games, stochastic differential games (91A15) Stochastic models in economics (91B70)

Abstract: We introduce an evolutionary game with feedback between perception and reality, which we call the reality game. It is a game of chance in which the probabilities for different objective outcomes (e.g., heads or tails in a coin toss) depend on the amount wagered on those outcomes. By varying the `reality map', which relates the amount wagered to the probability of the outcome, it is possible to move continuously from a purely objective game in which probabilities have no dependence on wagers to a purely subjective game in which probabilities equal the amount wagered. We study self-reinforcing games, in which betting more on an outcome increases its odds, and self-defeating games, in which the opposite is true. This is investigated in and out of equilibrium, with and without rational players, and both numerically and analytically. We introduce a method of measuring the inefficiency of the game, similar to measuring the magnitude of the arbitrage opportunities in a financial market. We prove that convergence to equilibrium is is a power law with an extremely slow rate of convergence: The more subjective the game, the slower the convergence.

Recommendations

• Introduction: Symposium on evolutionary game theory
• The asset market game
• Subjective vs. Objective Reality — The Risk of Running Late
• Evolutionary stability of prospect theory preferences
• Evolutionary games

Cites work

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Cited in

(5)

• Complementary variety: when can cooperation in uncertain environments outperform competitive selection?
• Game of the truel
• An open mind: memories of Ken Arrow
• Subjective vs. Objective Reality — The Risk of Running Late
• Illusion of control in time-horizon minority and Parrondo games

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