How Market Ecology Explains Market Malfunction

Our paper, How Market Ecology Explains Market Malfunction, is now published in the Proceedings of the National Academy of Sciences.

Read it here — it is open access.

It is joint work with Anisoara Calinescu and J. Doyne Farmer. We treat trading strategies as species in an ecosystem: the wealth invested in a strategy is its abundance, and a strategy’s returns depend on how much wealth is crowded into it and its competitors. From that analogy we show how markets misprice assets, amplify shocks, and malfunction — behaviour a representative-agent, equilibrium view does not predict.

The model, the ecology, and the figures are in the paper.