Relative wealth concerns, positive feedback, and financial fluctuation

Joohyun Kim and Duk Hee Lee

Journal of Simulation, 2017, vol. 11, issue 2, 128-136

Abstract: Recent studies have shown that imitation and adaptation are the dominant mechanisms of a positive feedback loop that leads to a dramatic amplification of stock prices. In this research, relative wealth concerns have been taken into account as the primary origin of the positive feedback effect. Specifically, relative wealth concerns alongside wealth inequality would change the risk attitude of each stock-trading agent to catch up with their peers’ wealth, by imitating and adapting their trading strategies. We simulate an artificial stock market via an agent-based modeling approach, which allows us to observe what happens to each agent’s relationships, providing a more insightful view than the traditional economic model. This research demonstrates how relative wealth concerns can affect today’s financial mechanism, by means of positive feedback effects.

Date: 2017
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DOI: 10.1057/s41273-016-0005-1

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