Herding effects in order driven markets: The rise and fall of gurus

• Published in: Journal of economic behavior & organization 2012, Vol.81 (1), p.82-96
• Main Authors: Tedeschi, Gabriele, Iori, Giulia, Gallegati, Mauro
• Format: Article
• Language: English
• Subjects: Agency theory; Behavior; Competition; Drivers; Dynamic network; Economic behaviour; Economic incentives; Economic models; Falls; Guru; Herding; Investment policy; Markets; Noise; Order driver market; Pastoralism; Securities trading; Studies; Traders; Wealth distribution
• ISSN: 0167-2681; 1879-1751
• DOI: 10.1016/j.jebo.2011.09.006

► We introduce an order driver market model with heterogeneous traders that imitate each other on a dynamic network structure. ► The communication structure evolves endogenously via a fitness mechanism based on agents performance. ► We study the emergence of herding and the wealth distribution of market participants (i.e. chartist, fundamentalist and noise traders). ► Our findings show that positive intelligence agents cannot invade a market populated by noise traders when herding is high. We introduce an order driver market model with heterogeneous traders that imitate each other on a dynamic network structure. The communication structure evolves endogenously via a fitness mechanism based on agents performance. We assess under which assumptions imitation, among noise traders, can give rise to the emergence of gurus and their rise and fall in popularity over time. We study the wealth distribution of gurus, followers and non followers and show that traders have an incentive to imitate and a desire to be imitated since herding turns out to be profitable. The model is then used to study the effect that different competitive strategies (i.e. chartist & fundamentalist) have on agents performance. Our findings show that positive intelligence agents cannot invade a market populated by noise traders when herding is high.