IFREE-Sponsored Lecture Series at ESI

Blake LeBaron, Ph.D.
Mar. 4th, 2011

"Heterogeneous Gain Learning and the Dynamics of Asset Prices "

"Much of my research has been concerned with the construction of agent-based financial markets. These are financial markets represented by the interacting behavior many computer simulated trading strategies. The actual economic structure of these markets can often be similar to experimental markets, with human subjects replaced by computer algorithms. They share many principles at the core of experimental economics. First, they both view the world as populated by boundedly rational, but purposeful players solving problems in reasonable economic situations. Second, the world is heterogeneous, and this heterogeneity of behavior, beliefs, and tastes can be very important, and very different from more traditional economic theorizing.

My work does exist in a kind of symbiotic relationship with experimental work. The agent-based modeler can run experiments aggregating very precise behavioral structures, and do this for a very long time, with many computer subjects. However, in the end the realism of such experiments depends on whether the programmed agent behavior draws from behavior observed in laboratory settings with human subjects. Besides reinforcing each other both fields can enhance empirical work by giving us new insights into which features we should be looking at, and which data we should work hard to gather in the future."

Bio:
A specialist in high-technology finance, Blake LeBaron's research deals with domestic and international financial markets. He is involved in empirical and theoretical studies of asset market behavior. The latter area involves building "artificial stock markets" with simulated computer traders. He teaches courses in macroeconomics and econometrics. A former faculty member at the University of Wisconsin, he holds a Ph.D. from the University of Chicago.

Abstract:
This paper presents a new agent-based financial market. It is designed to be both simple enough to gain insights into the nature and structure of what is going on at both the agent and macro levels, but remain rich enough to allow for many interesting evolutionary experiments. The model is driven by heterogeneous agents who put varying weights on past information as they design portfolio strategies. It faithfully generates many of the common stylized features of asset markets. It also yields some insights into the dynamics of agent strategies and how they yield market instabilities.

Return to the IFREE-ESI Lecture Series