Personal Finance Decisions with Untruthful Advisors: an Agent-Based Model

TL;DR

This paper develops an agent-based model to analyze how untruthful financial advisors influence investor decisions, exploring equilibrium outcomes and the impact of advisor and investor compromises.

Contribution

It introduces a formal game-theoretic agent-based model capturing the dynamics between investors and untruthful advisors, including equilibrium analysis.

Findings

Identifies parameter regions with acceptable equilibria.

Shows how customer naivety and greediness emerge from the model.

Analyzes the efficiency of Nash equilibria.

Abstract

Investors usually resort to financial advisors to improve their investment process until the point of complete delegation on investment decisions. Surely, financial advice is potentially a correcting factor in investment decisions but, in the past, the media and regulators blamed biased advisors for manipulating the expectations of naive investors. In order to give an analytic formulation of the problem, we present an Agent-Based Model formed by individual investors and a financial advisor. We parametrize the games by considering a compromise for the financial advisor (between a sufficient reward by bank and to keep his/her reputation), and a compromise for the customers (between the desired return and the proposed return by advisor). Then we obtain the Nash equilibria and the best response functions of the resulting game. We also describe the parameter regions in which these points result acceptable equilibria and the greediness/naivety of the customers emerge naturally from the model. Finally, we focus on the efficiency of the best Nash equilibrium.