Genetic Programming Learning in the Cobweb Model with Speculators

Abstract

The nature of speculators is studied with genetic programming. Speculators play an extremely controversial role in economic theory. With the positive aspects of speculators have been well formalized in the neo-classical economics framework, the potential negative aspects of speculators have not been treated equally well, in particular, the consequences of “speculating about the speculations of others”. In spirit of the earlier works done by Arthur (1992) and Palmer et al. (1993), this paper models speculators with genetic programming (GP) in a production economy (Muthian Economy). Through genetic programming, we approximate the consequences of “speculating about the speculations of others”, including the price volatility and the resulting welfare loss. Some of the patterns observed in our simulations are consistent with findings in experimental markets with human subjects. For example, we show the GP-based speculators can be noisy by nature. However, when appropriate financial regulations are imposed, GP-based speculators can also be more informative than noisy. On the other hand, our simulations results generally do not support the prediction based on rational expectations hypothesis.