A model of subjective supply-demand: the maximum Boltzmann/Shannon entropy solution

TL;DR

This paper introduces a thermodynamic-inspired trading model using maximum entropy principles, showing that profit intensity reaches a maximum at a fixed point related to the Golden Ratio, regardless of demand curve shapes.

Contribution

It proposes a novel subjective supply-demand model incorporating maximum entropy, extending economic analysis with thermodynamical concepts and fixed point properties.

Findings

Profit intensity attains a maximum at a fixed point.

The fixed point corresponds to the Golden Ratio.

The model accounts for subjective market perceptions.

Abstract

We investigate activities that have different periods of duration. We define the profit intensity as a measure of this economic category. The profit intensity in a repeated trading has a unique property of attaining its maximum at a fixed point regardless of the shape of demand curves for a wide class of probability distributions of random reverse transaction (ie closing of the position). This type of market games is often considered in the research aiming at finding an algorithm that maximizes profit of a trader who negotiates prices with the Rest of the World (a collective opponent) that posses a definite and objective supply profile. Such idealization neglects the sometimes important influence of an individual trader on the demand/supply profile of the Rest of the World and in extreme cases questions the very idea of demand/supply profile. Therefore we put forward a trading model in which the demand/supply profile of the Rest of the World induces the (rational) trader to (subjectively) presume that he/she lacks (almost) all knowledge concerning the market but his/hers average frequency of trade. This point of view introduces maximum entropy principles into the model and broadens the range of economics phenomena that can be perceived as a sort of thermodynamical system. As a consequence, the profit intensity has a fixed point:the profit in tensity reaches its maximum when the probability of transaction is given by the Golden Ratio rule $\frac{\sqrt{5}-1}{2}$.