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Related Experiment Video

Updated: May 3, 2026

Measuring the Subjective Value of Risky and Ambiguous Options using Experimental Economics and Functional MRI Methods

Measuring the Subjective Value of Risky and Ambiguous Options using Experimental Economics and Functional MRI Methods

Published on: September 19, 2012

Reducing financial avalanches by random investments.

Alessio Emanuele Biondo¹, Alessandro Pluchino², Andrea Rapisarda²

¹Dipartimento di Economia e Impresa, Universitá di Catania, Corso Italia 55, 95129 Catania, Italy.

Physical Review. E, Statistical, Nonlinear, and Soft Matter Physics

|February 4, 2014

Summary

This summary is machine-generated.

Introducing random traders into financial markets significantly reduces the size of market avalanches. This finding offers a strategy to mitigate financial bubbles and crashes by analyzing herding behavior.

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Area of Science:

Complex systems science
Quantitative finance
Agent-based modeling

Background:

Financial markets exhibit extreme events similar to earthquakes.
Herding behavior and avalanche dynamics are key features of market instability.
Understanding these dynamics is crucial for financial stability.

Purpose of the Study:

To model herding and avalanche dynamics in financial markets using a self-organized criticality model.
To investigate the impact of different trading strategies on market stability.
To identify strategies for mitigating financial bubbles and crashes.

Main Methods:

Developed a self-organized criticality-generating model.
Simulated a community of interacting investors on a small-world network.
Incorporated historical S&P 500 data to define market behavior.
Introduced a percentage of randomly strategizing traders.

Main Results:

A small percentage of random traders significantly reduces the size of herding-related avalanches.
Wealth distribution for all traders follows a Pareto power law.
Wealth distribution for random traders follows an exponential law.
Technical traders face a higher risk of losses compared to random traders.

Conclusions:

Random trading strategies can effectively dampen extreme market fluctuations.
The findings provide a novel approach to limit financial bubbles and crashes.
The study highlights the differing risk profiles of technical versus random traders.