A Prisoner's Dilemma Causes Technical Trading
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چکیده
We examine the use and pro tability of technical trading rules in nancial markets by studying the Santa Fe Stock Market, an agent-based model of a stock market, in which traders make investment decisions by forecasting stock prices using technical and fundamental rules. We show that individual traders earn more by using technical rules, no matter what other traders do, so the use of technical trading rules is everyone's dominant strategy. We also show that agents would collectively earn more if nobody used technical trading rules than if everyone used them. Thus, technical trading becomes widespread due to a multi-person prisoner's dilemma. This prisoner's dilemma arises because technical trading generates positive-feedback, destabilizes prices and makes everyone's market forecasts less accurate over time. JEL classi cation code: G10
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تاریخ انتشار 1999