Emergence from Emergence: Financial Market Simulation via Learning with Heterogeneous Preferences

TL;DR

This paper introduces a multi-agent reinforcement learning model where agents with diverse preferences learn trading strategies, leading to realistic market phenomena like fat tails and volatility clustering, highlighting the importance of joint modeling of preferences and learning.

Contribution

It develops a unified framework combining heterogeneous preferences and learning, demonstrating their joint impact on emergent market behaviors in agent-based models.

Findings

Agents develop strategies aligned with their traits.

Differentiated interactions lead to realistic market dynamics.

Heterogeneous preferences and learning jointly enable two-stage emergence.

Abstract

Agent-based models help explain stock price dynamics as emergent phenomena driven by interacting investors. In this modeling tradition, investor behavior has typically been captured by two distinct mechanisms -- learning and heterogeneous preferences -- which have been explored as separate paradigms in prior studies. However, the impact of their joint modeling on the resulting collective dynamics remains largely unexplored. We develop a multi-agent reinforcement learning framework in which agents endowed with heterogeneous risk aversion, time discounting, and information access collectively learn trading strategies within a unified shared-policy framework. The experiment reveals that (i) learning with heterogeneous preferences drives agents to develop strategies aligned with their individual traits, fostering behavioral differentiation and niche specialization within the market, and (ii) the interactions by the differentiated agents are essential for the emergence of realistic market dynamics such as fat-tailed price fluctuations and volatility clustering. This study presents a constructive paradigm for financial market modeling in which the joint design of heterogeneous preferences and learning mechanisms enables two-stage emergence: individual behavior and the collective market dynamics.