Abstract:
A dynamic model of financial markets with learning is demonstrated to produce a selforganized
system that displays critical behavior. The price contains private information that
traders learn to extract and employ to forecast future value. Since the price reflects the beliefs
of the traders, the learning process is self-referencing. As the market learns to correctly extract
information from the price, the market deemphasizes private information. Despite the
convergence of the model towards the parameters producing efficiency, pricing deviations
remain constant due to the increased sensitivity of the price to small errors in information
extraction produced by the model’s own convergence.
