Micro and macro benefits of random investments in financial markets

Abstract

In this paper, making use of recent statistical physics techniques and models, we address the specific role of randomness in financial markets, both at the micro and the macro level. In particular, we review some recent results obtained about the effectiveness of random strategies of investment, compared with some of the most used trading strategies for forecasting the behavior of real financial indexes. We also push forward our analysis by means of a Self-Organized Criticality model, able to simulate financial avalanches in trading communities with different network topologies, where a Pareto-like power law behavior of wealth spontaneously emerges. In this context, we present new findings and suggestions for policies based on the effects that random strategies can have in terms of reduction of dangerous financial extreme events, i.e. bubbles and crashes.

Talent Versus Luck: The Role of Randomness in Success and Failure

“…The latter is a further confirmation that, in complex social and economical contexts where chance plays a relevant role, the efficiency of alternative strategies based on random choices can easily overtake that of standard strategies based on the "naively meritocratic" approach. Such a counterintuitive phenomenon, already observed in management, politics and finance ( [48,49,50,51,52,53,54,55]), finds therefore new evidence also in the research funding context.…”

“…In other words, if luck matters, and if it matters more than we are willing to admit, it is not strange that meritocratic strategies reveal less effective than expected, in particular if we try to evaluate merit ex-post. In previous studies [48,49,50,51,52,53,54,55], there was already a warning against this sort of "naive meritocracy", showing the effectiveness of alternative strategies based on random choices in management, politics and finance. Consistently with such a perspective, the TvL model shows how the minimum level of success of the most talented people can be increased, in a world where luck is important and serendipity is often the cause of important discoveries.…”

Order book, financial markets, and self-organized criticality

“…They neither influence other traders, nor are influenced by them. For this reason, as it has been shown in previous studies [12,14,29], their role results to be crucial in damping the size of avalanches and reducing the contagion effect.…”

“…The behavioral variability of agents operating in a complex network structure endowed with different informative sets justifies the evidence that empirical phenomena of socio-economic systems need new and alternative approaches. As an example, the beneficial role of random strategies has been shown in several recent papers for the efficiency of socio-economic systems [8][9][10], and in particular of financial markets [11][12][13][14]. Agent-based models may play a key role in understanding complex economic dynamics, needed for innovative policy design [15].…”

Modeling surveys effects in political competitions

“…The main motivation of this paper is to show, by means of agent-based simulations, whether and to which extent, the informative signals can effectively play a role in political competitions among participating parties or coalitions. During these last years, agent-based models have been extensively adopted in order to investigate emergent behavior and describe the implications of complexity in several socio-economic phenomena as in [8,19,10,17,18,11,12,13,14,9,15,16,59,58,60] among many others.…”