SBR-9422670 William Brock In real-world economic markets, traders base their actions on their predictions about the future. The choice of predictor, furthermore, is purposeful. That is, it is based on how ell the predictor has performed in the past. Predictors that do well relative to other predictors are gradually adopted. But their increased popularity reduces their predictive power. It follows that the distribution of predictors is determined by a complex dynamical system that can be expected to behave chaotically. In the first part of this multi-project study, the P.I. studies this dynamical system both analytically and through numerical simulation. The second project examines the equilibrium production of information in speculative markets. Information here means the ability to detect noisy signals and equilibrium means a rational expectations equilibrium. Superior information translates into higher profits but this information is costly to acquire. The P.I. applies the methods of the first project on adaptive dynamics to the study of the evolution of this market to an equilibrium. The resulting model predicts many stylized facts about actual speculative markets, such as those for stocks.
