Adaptive Competition, Market Efficiency, Phase Transitions and Spin-Glasses

TL;DR

This paper models adaptive competition among agents, revealing a phase transition from efficient to inefficient markets based on strategy pool size, with implications for understanding social and biological systems and spin-glass behavior.

Contribution

It introduces a simple adaptive competition model exhibiting a phase transition, linking market efficiency to strategy pool size and spin-glass-like features.

Findings

System exhibits a phase change at a critical strategy pool size.

Efficient phase: no agent outperforms random guessing, total points are minimized.

Inefficient phase: predictive information allows some agents to outperform random guesses.

Abstract

We analyze a simple model of adaptive competition which captures essential features of a variety of adaptive competitive systems in the social and biological sciences. Each of N agents, at each time step of a game, joins one of two groups. The agents in the minority group are awarded a point, while the agents in the majority group get nothing. Each agent has a fixed set of strategies drawn at the beginning of the game from a common pool, and chooses his current best-performing strategy to determine which group to join. For a fixed N, the system exhibits a phase change as a function of the size of the common strategy pool from which the agents initially draw their strategies. For small pool sizes, the system is in an efficient market phase. All information that can be used by the agents' strategies is traded away, no agent can accumulate more points than would an agent making random guesses, and thus the commons suffer,since relatively few points are awarded to the agents in total. For large initial strategy pool sizes, the system is in an inefficient market phase, in which there is predictive information available to the agents' strategies, and some agents can do better than random at accumulating points. In this phase, the total number of points awarded to the agents is greater than in a game in which all agents guess randomly, and so the commons do relatively well. At a critical size of the strategy pool marking the cross-over from the efficient market to the inefficient market phases, the commons do best. This critical size of the pool grows monotonically with N. The behavior of this system has some features reminiscent of a spin-glass.