2006 IEEE Congress on Evolutionary Computation Sheraton Vancouver Wall Centre Hotel, Vancouver, BC, Canada July 16-21,

2006

Minority Game as a Model for the Artificial Financial Markets

Mieko Tanaka-Yamawaki and Seiji Tokuoka, Department of Information and Knowledge Engineering, Faculty of Engineering, Tottori University, Tottori 680-8550 Japan
mieko

Abstract What are the conditions required for a good artificial market? Simplicity, expandability, reality, good learning capability, sustainability are the elements definitely to be included into the model. Minority Game is one of those candidate models that depict necessary features for an artificial market. It is an evolutionary game designed for modeling the financial market made of heterogeneous agents with learning ability. Those agents are equipped with limited intelligence in space and time and they have access to public information, but independent otherwise. However, the rule of the original form of the minority game has an essential defect. The winners receive the same reward no matter how small the number of the minority agents is. This is unnatural, and this is the very reason why the conventional form of the minority game fails to reproduce the realistic wealth distribution among agents, namely, Ginis coefficient being much too small compared to the observed value. To remedy this, winners with larger risk ought to be rewarded better. We show how this modification saves the model and reproduce the realistic wealth distribution ( G 0.5 ) known from the statistics.

number 2 k . This implies the agents intelligence is highly limited in terms of space, i.e., each agent has a capacity of having S strategies in his strategy table. A strategy set is produced for each agent randomly at the beginning of the game and is kept unchanged throughout the game. Learning ability is limited to the choice of the best strategy according to the point given to the strategy. If an agent wins/loses the game by using the chosen strategy, it gains/loses a point in the strategy table. Agents do not communicate each other; and they do not know other agents strategy table. Their intelligence is also limited in terms of time. The memory length M is not very long. All the agents have the same S and M. An example of a strategy table is shown in Table 1 for the
TABLE I
EXAMPLE OF THE STRATEGY TABLE (M=2,S=3)

Winning History 00 01 10 11

STRATEGY1 1 0 0 0

STRATEGY2 1 0 1 0

STRATEGY3 1 1 1 0

HE minority game (MG) is an evolutionary game designed for modeling the financial market made of heterogeneous agents with learning ability [1, 2]. The major function of those agents is to decide one out of two possible actions, say 0 or 1, corresponding to buy or sell, buy or not to buy, etc. and all the agents who have made the minority choice win the game. Which choice has won the game becomes the public information open to all the agents. Each agent decides 0 or 1 following the strategy with the highest score in their strategy table and they are bound to choose the best strategy out of the individual strategy table at each time. Each strategy is a choice of 0 or 1 corresponding to the M-step history. There are 2 k possible strategies corresponding to k = 2 M possible histories, and the size S of the strategy table is supposed to be much smaller than the maximum This work was supported in part by the Japan Foundation of Promoting Science for the Grant-In-Aid Scientific Research (C)(2) 14580385. M. Tanaka-Yamawaki is with the Department of Information and Knowledge Engineering, Tottori University, Tottori 680-8552 JAPAN (phone: +81-857-31-5223; fax: +81-857-31-0879; e-mail: mieko@ike.tottori-u.ac.jp). S. Tokuoka., is with the Department of Information and Knowledge Engineering, Tottori University, Tottori 680-8552 JAPAN
0-7803-9487-9/06/$20.00/2006 IEEE

I. INTRODUCTION

case of M=2 and S=3. Though MG is invented as a model of an artificial market, simulation results of MG-oriented artificial society indicate that the numbers of winning games for most agents remain almost equal throughout a series of games. In other words, the society made of MG agents is a highly equal society. Since individual agents are given different sets of strategies, this fact tells us that the used strategies are also equal and there is no outstanding one. In order to make the model more meaningful, we consider two ways of modifying the standard MG. One is to change the rewarding scheme (RMG) and the other is to introduce agents assets explicitly (IMG), and its further modification with tax effect (TMG). We will show that this new model TMG derives a realistic wealth distribution among agents in terms of Ginis coefficient as well as Paretos index. The structure of the paper is as follows. Section II describes our interpretation for the meaning of MG. Section III is devoted to explain the problem of equal agents in the standard MG (SMG) and to introduce the first way (RMG) of solving the equality problem by changing the rewarding scheme. Section IV presents the result of RMG in terms of Ginis coefficient, which is compared with the result of IMG and

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TMG, the second way of solving the equality problem by introducing assets explicitly. We then conclude that TMG can solve the problem nicely when the tax rate and the investment rate are about the same. Section V examines Paretos law by looking for the linearity in log-log plot of accumulated wealth distributions and show that TMG is in good agreement to the observed Paretos index. Section VI concludes the paper. II. IMPLICATION OF THE MINORITY GAME (MG) The basic assumption of the minority game sounds a little odd. First, the traders seem to follow the majority in order to gain profit in the trades. Indeed many day-traders behave as trendfollowers and take small profits by making frequent small trades. On the other hand, investors or long-term traders do not chase small profits. They invest before the stock price rises and sell when many others start following the trend. In other words, they are minorities. Traders always try to outwit others. They would think of buying while others are selling, and selling while others are buying. They are content if such a choice was a success. Seemingly a result of much deliberation, a traders satisfaction simply comes from the action he took was indeed the right one. Traders also know the history is useful if it is not too long. Contrary to other games such as chess, a long process of thinking is meaningless for the game of trading. What is important is when the current trend ends and the market enter the reverse trend cycle. Those who can judge the moment of turnaround would win by outwitting the others. Traders usually do not exchange ideas each other. They are independent agents. They all have a common knowledge of price history of the market in the near past, e.g., whether many traders sold last weekend or not, and use it to make their own decisions. The market trend is formed when the bulk of traders make the same choice. This occurs as a stochastic process. In other words no one can predict based on any deterministic logic exactly when it occurs and how. The asset price is another stochastic process in the market. Those two processes are correlated each other. One drastic assumption is to regard those two processes as a single stochastic process of the system. MG is thus derived following such assumptions.

Fig. 1 Number of winning agents is shown as a function of memory M for various S values, from 2 (largest for M>1) to 32 (lowest for M>1), for agent number N=201 in the case of original MG. The results are the averaged numbers over 100 trials, where each trial has 10,000 repeated games of MG.

MG exhibits self-organized behavior [1]. An MG-based market has consistently larger winners than the case of random strategy as shown in Fig.1. Since the agents do not communicate each other and they are not given any motivation to collaborate, this spontaneous emergence of self-organization is a nontrivial result. Fig.1 shows that significantly many agents win for S < 10 in most range of memory size M, since the maximum number of winners is 100 for the case of N=201. It is a little odd to see that the performance of MG for S > 10 for M < 5 is much worse than the horizontal line at 94.8 representing the random strategy, since we would expect better performance for more intelligent agents having large memory length M and memory size S. From now on, we focus on the parameter range S < 10 and M<10, in which the strategy makes sense. III. PROBLEMS OF SMG AND ITS SOLUTION BY RMG Minority game in its standard form is unsatisfactory considering the traders nature, or even at the stage of El Farol problem concerning a chance of visiting the pub at a good time or crowded time [3]. The more profit is promised to each winner for the less number of winners. This factor is missing in the standard minority game. Giving the same reward to the owners of the winning strategy, the standard minority game successfully maintains a long-lived society for a very long time, with a penalty of unnaturally even distribution of wealth among agents. As shown in Fig.2, the agents have almost equal winning chances throughout the games. Assuming that the agents receive rewards proportional to the number of winning games, the wealth distribution among agents is almost even. In order to remedy this defect, we attempt to alter the basic rule of MG in various manners.
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winTimes

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S=2 S=4 S=8 S = 16 S = 32 random

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Fig. 2 Average numbers of winning games out of 10,000 at each trial are shown in the descending order for N=201 players, for the Standard MG with S=4, M=1,3,5,7,9. Note that the numbers of winning games are located within a very narrow range except for M=1, indicating that the wealth distribution is highly even over the entire society.

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First, we try to change the rewarding scheme by giving +2 for winning strategy and -1 for each losing strategy. By encouraging the winners, we expect to promote selfish competitions among agents. We call this model the reward-driven Minority Game (RMG) [4]. The result shown in Fig. 3 surprisingly tells us that this model promotes more cooperation among agents, and less dependence on the size of intelligence S. Also for small memory length (M=1-3) the average winners are close to the maximum (100 for N=201), for which the society members enjoy the maximum profits as a whole. The only disadvantage of our reward-driven MG of (+2,-1) rewarding system compared to the standard model seems to be the biased distribution of wealth.

average number of winners

100 99 98 97

S=2 S=4 S=8 S = 16 S = 32 random

96 95 94

agents in the descending order for the case of SMG. We can see that, except for the case of M=1, most agents win approximately 4,800 times out of total 10,000 games, which indicates that the society of SMG is highly even. Fig.4 shows the corresponding result for RMG for S=4, M=1,3,5,7,9, N=201, which indicates that the numbers of winning games for 201 agents distribute over wider range from 3,000 to 7,000 for the case of RMG (+2,-1). The society of RMG is uneven compared to that of SMG. We have also tried other choices of rewarding scheme such as (+3,-1), (+4,-1), (+10,-1), and (+1,-2) for N=201, S=8. The first three choices (+3,-1), (+4,-1), and (+10,-1) do not make any essential difference from (+2, -1). The choice of opposite direction (+1,-2), on the other hand, makes the numbers of winners much smaller (ranging from 80 to 92) than the random strategy (slightly bellow 95) thus discarded. The reason why this rewarding scheme fails to produce the spontaneous collaboration is supposed to be as follows. Under such a situation, the agents keep changing the strategies and loose a chance to stick to a certain selected strategy while wondering around the strategy apace. In this regard, the reward-driven scheme tends to stick to a very few strategies at the early stage of the simulation [4]. IV. GINIS COEFFICIENT AND TMG

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Fig. 3 Number of winning agents as a function of M for the reward-driven model (RMG). Note that the winning rate is consistently higher than the random strategy represented by a horizontal line at 94.8.
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Ginis coefficient is frequently used to represent the evenness of wealth distribution. The range of this coefficient is
0 G ( N 1) / N

M=1 M=3 M=5 M=7 M=9

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Fig.4 Average numbers of winning games out of 10,000 at each trial are shown in the descending order for N=201 players, for the Reward-driven MG of (+2,-1) rewarding scheme with S=4, M=1,3,5,7,9. The numbers of winning games are distributed over wider range compared to the standard MG, indicating that the wealth distribution is more biased compared to the standard model.

In order to see what is happening more closely, we compare the number of winning games for each agent for the standard MG (SMG) and our reward-driven MG (RMG). Fig.2 shows the number of winning games of all the 201

where the minimum value G=0 occurs when the wealth is equally distributed to all the agents, while the maximum G=(N-1)/N is achieved when the whole wealth is concentrated to a single agent. The more biased wealth distribution corresponds to the larger value of G. The statistical value of G is reported to be around G=0.5 in the case of Japanese household in 2002 [5] and around G=0.7 for the world average. Ginis coefficient for the SMG reproduced for the case of N=201, S=4, M=8 is shown in Fig.5 as a time series of a simulation. The curve quickly falls to a very small value close to 0.01, which is far from the reality. This situation reflects the fact that all the agents are equally rich in this artificial society. Our model RMG saves the situation considerably. The biased winning chances in RMG as shown in Fig. 4 results in much larger Ginis coefficient as shown in Fig. 6, where the curve saturates around G=0.2. This amounts to about one half of the statistical value in Ref. 5. Another way of having a biased wealth distribution is to introduce a direct exchange of asset to reward the winners. By doing this, we can avoid the defect of MG where the degree of minority is neglected entirely and the agent is rewarded by the equal amount no matter how small the minority group is. Introduction of direct asset exchange among agents requires a constitutional change of the model.

winTimes

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Ref. 6 is an example of such a model. The agents in this model start with equal amount of assets. They invest the portion of their own assets, with the constant rate (r), before each game. The winner (i.e. minority agents) receives a portion of the sum of invested asset in proportion to the invested amount. We call this model as an Investing Minority Game (IMG)
1

converges to the values much too large compared to the observed value in all the three cases. Fig. 8 shows the result of choosing r=0.001, where the convergence of G takes more time but eventually saturates towards 1. This fact corresponds to the fact that the society made out of IMG seems too biased in terms of wealth distribution.
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Gini's coefficient

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Fig.7 Time series of Ginis coefficient (G) for the investing minority game (IMG, N=10001,S=4,M=8). G converges quickly to 1 for large investment rate (r=0.1, 0.3), and more slowly for smaller investment rate (r=0.01).

Time

Fig.5 Time series of Ginis coefficient (G) for the standard minority game (RMG, N=201,S=4,M=8). Ginia coefficient quickly converges to 0.01 which is much too small compared to the observed value, G 0.5 , indicating that the wealth is evenly distributed among agents.
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Fig.6 Time series of Ginis coefficient (G) for the reward-driven minority game (RMG, N=201,S=4,M=8). G converges to 0.2 which is approximately one half of the observed value [8].

Fig.8 Time series of Ginis coefficient (G) for the investing minority game (IMG, N=10001,S=4,M=8) for the case of very small investment rate, r=0.001. G eventually converges to 1 after a long time.

However, the investing version of MG (IMG) proposed in Ref. 6 cannot save the MG-oriented artificial market. The coefficient G quickly saturates around the value very close to 1 as shown in Fig. 7. Parameters chosen to take data for Fig. 7 are N=10001, S=4, M=8, and r=0.3, 0.1, 0.01, corresponding to the upper, middle, lower line, respectively. We use N=10001 to show the result of IMG and TMG, mainly because N=201 is not enough to see the scale-invariant nature of the Pareto distribution, though the qualitative features of G in Fig.5 and Fig.6 are about the same as the case of N=201. While choosing the smaller investment rate r, say r=0.01, can slow down the growth of G and lowers the saturated value slightly compared to the cases like r=0.1 or r=0.3, G

To remedy this situation, we consider further modification of MG that pulls back the biased wealth distribution created by the investment activity. We apply a fixed rate (Z) of tax to all the winners. The rate Z is applied for the share to be distributed to the winners and the sum of the collected tax is re-distributed to all the winners evenly. We call this version of MG as the investing version of the standard minority game with tax-redistribution effect, TMG. The time series of Ginis coefficients obtained from the simulation experiments are shown in Fig.9 for r=0.01 and Fig.10 for r = 0.3, in which five lines corresponding to Z=0.01, 0.05, 0.1, 0.2, 0.3 are plotted from the top to the bottom. The best fit to the real-world case is obtained for the case of Z=r.

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0.45 0.4

Gini's coefficient

0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 0 10000 20000 30000 40000 50000

five lines corresponding to r=0.3, 0.2, 0.1, 0.05, 0.01, from the top to the bottom. The coefficient G takes the value close to the observed value G=0.5 for r=Z It is worthwhile at this moment to compare the essence of SMG and TMG (as well as IMG). The original form of MG (SMG) guarantees the same amount of reward no matter how large the size of minority is, as shown in Fig. 12. On the other hand, TMG and IMG give a fixed amount of reward to the winners group and each winner receives the total reward divided by the number of winners, as shown in Fig.13.
SMG

Time
Fig.9 Time series of Ginis coefficient for the investing minority game with tax effect (TMG, r=0.01, N=10001,S=4,M=8) for various rates of Tax. The five lines correspond to Z=0.01, 0.05, 0.1, 0.2, 0.3, from the top to the bottom. The coefficient G saturates around 0.45, close to the observed value for Z=r.

Each winner receives one unit of reward lose win

Gini's coefficient

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Fig.12 Rewarding scheme of SMG. Each winner receives the same amount of reward. The resulting wealth distribution is very even, corresponding to G<<1, and large Paretos index (=48)

Time
Fig.10 Time series of Ginis coefficient for the investing minority game with tax effect (TMG, r=0. 3, N=10001,S=4,M=8) for various rates of Tax. The five lines correspond to Z=0.01, 0.05, 0.1, 0.2, 0.3, from the top to the bottom. The coefficient G takes the value close to the observed value G=0.5 for Z=r.

TMG,IMG

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Each winner receives 1/3 unit of asset lose win

Gini's coefficient

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Fig.11 Time series of Ginis coefficient f for the investing minority game with tax effect (TMG, Z=0.1, N=10001,S=4,M=8) for various values of investment rate r, r=0.3, 0.2, 0.1, 0.05, 0.01, from the top to the bottom. The coefficient G takes the realistic value of 0.4 for r=Z.

Fig.13 Rewarding scheme of TMG, IMG. Winners share the reward. Accordingly each winner receives the total reward divided by the number of winning agents. The resulting wealth distribution is in good agreement with the real value in terms of G=0.5, and the reasonable Paretos index (=1.8) V.

PARETOS DISTRIBUTION

Fig.11 shows the same result from the different perspective, namely, the time series of G for r=0.1 (Fig.11) is plotted in

Wealth distribution of top few percent of wealthy members is known to have a scaling property, which is indicated by the power-law behavior in the accumulated distribution [7, 8]. More recent empirical studies based on the real data partly

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have confirmed the above result [9, 10] and narrowed down the size of Paretos index within the range around 1-4. The results of SMG, RMG and TMG are shown in Fig. 14, 15, 16, respectively. The scale-invariant property and the size of Paretos index are nicely reproduced in the case of TMG as shown in Fig. 16.

accumulated distribution

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Fig.14 Accumulated distribution of wealth among agents in the investing minority game with tax effect (SMG, N=201,S=4,M=8)
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0.01

has a problem of giving the same reward to the winners regardless of the size of minority. Ginis coefficient G is extremely small compared to the realistic size. To remedy this situation, we have considered two different versions of MG. One is to introduce a biased rewarding scheme named reward-driven minority game (RMG) which gives more rewards to the winners and less penalties to the losers. Ginis coefficient of RMG saturates around G=0.2 which is close to one half of the real statistical value of G=0.5. Another way of altering the model is to explicitly introduce a new variable of agents asset in order to allow direct exchanges of assets among agents. This version of MG, named investing MG (IMG), creates accelerated concentration of wealth so that Ginis coefficient (G) eventually saturates to a very large number near 1, which is too large compared to the real value. Changing r, representing the rate of invested amount out of the total asset, does not help the situation. We further modified the model to introduce re-distribution of the earned amount in IMG, i.e., tax effect. This new model called taxed MG (TMG) successfully reproduce the realistic value of Ginis coefficient at the cost of adjusting two parameters, investment rate, r and the tax rate, Z. Moreover, our new model TMG has proved, via simulation, to reproduce the scaling behavior (a straight line in log-log plot) in the accumulated wealth distribution and the corresponding Paretos index comes out to be consistent with the measured values. REFERENCES
[1] D. Challet and Y.-C. Zhang, Physica, Emergence of Cooperation and Organization in an Evolutionary Game, A246, 1997, pp.407-418. [2] D. Challet, M.,Marsili, and Y.-C. Zhang, Minority Games-inveracting agents in financial markets}, Oxford University Press, 2005 [3] W.B. Arthur, Am. Econ. Assoc. Papers and Proc., vol.84, 1994, pp.406-411. [4] M. Tanaka-Yamawaki and S. Tokuoka, Wealth Concentration Problem in the Minority Game, Proc 4th Int. Workshop on Agent-based Approaches in Economic and Social Complex Systems,July 9-13,2005 Tokyo Inst. Tech. Japan, 2005, pp.237-241. [5] Report on Income Distribution in Japan (Ministry of Health, Labor and Welfare, Japan 2002).15, 5 (Nov. 1993), 795-825. [6] K. Toda and Y. Nakamura, Wealth Dynamics in the Minority Game IPSJ-TOM14, 2006. [7] V. Pareto, Cours dEconomique Politique, McMillan, London 1897. [8] E.W. Montroll and M.F. Shlesinger, Journal of Statistical Physics, 1984; [9] H. Aoyama, W. Souma, Y. Nagahara, H.P. Okazaki, H. Takayasu, and M. Takayasu, Fractals 8, 2000, pp.293; W. Souma, Fractals 9, 2001, pp.463; A. Ishikawa, Physica A 349, 2005, pp.597. [10] A. Chatterjee, S. Yarlagadda, and B.K.Chakrabati (Eds.), Econophysics of Wealth Distributions (Springer, 2005)

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Fig.15 Accumulated distribution of wealth among agents in the investing minority game with tax effect (RMG, N=201,S=4,M=8)

accumulated distribution

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Fig.16 Accumulated distribution of wealth among agents in the investing minority game with tax effect (TMG, r=0.3, Z=0.3, N=10001,S=4,M=8)

VI. CONCLUSION We have investigated the wealth distribution problem of an artificial society playing minority games as the major activity of the society. The original version of minority game (SMG)
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