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A Behavioral and Rational Investor Modeling to Explain Subprime Crisis: Multi Agent Systems Simulation in Artificial Financial Markets

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Financial Decision Aid Using Multiple Criteria

Part of the book series: Multiple Criteria Decision Making ((MCDM))

Abstract

The aim of this paper is to explain the financial crisis via the investors’ psychological behavior and rational reasoning. We specifically focus on three main biases: overconfidence, loss aversion and mimetic behavior.

We propose a new conceptual model of financial decision-making representing the stock market dynamics during the crisis period. We construct an artificial financial market that has two types of investors: institutional and individual. The latter are classified into two groups: the noise traders and the mimetic investors.

A simple experimentation of our model is elaborated to simulate the behavior of the investors during the different phases of a crisis: the formation and the break-up of the speculative bubble. We conclude that the interaction between rational and irrational behavior and the investor’s psychology must be considered in the explanation of financial crises, overconfidence and loss aversion are two behavioral biases very relevant to explain the formation and bursting of bubbles. Finally, mimetic behavior amplifies disturbances in the financial market and limits arbitrage.

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Author information

Authors and Affiliations

  1. Financial and Accounting Methods Department, FSEG, Mahdia, Tunisia

    Yosra Ben Said

  2. Monastir University, Monastir, Tunisia

    Yosra Ben Said

  3. E.A.S Research Unit, Mahdia, Tunisia

    Yosra Ben Said

  4. Computer Science Department, ISSATSo, Sousse-University, Sousse, Tunisia

    Dalel Kanzari

  5. COSMOS-ENSI Laboratory, Tunis, Tunisia

    Dalel Kanzari

  6. ISG-Sousse, Sousse, Tunisia

    Marwa Bezzine

Authors
  1. Yosra Ben Said
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  2. Dalel Kanzari
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  3. Marwa Bezzine
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Corresponding author

Correspondence to Yosra Ben Said .

Editor information

Editors and Affiliations

  1. College of Business Administration, University of Bahrain, Sakhir, Bahrain

    Hatem Masri

  2. Department of Quantitative Economics, University of Oviedo, Oviedo, Asturias, Spain

    Blanca Pérez-Gladish

  3. School of Production Engineering and Management, Technical University of Crete, Chania, Greece

    Constantin Zopounidis

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Said, Y.B., Kanzari, D., Bezzine, M. (2018). A Behavioral and Rational Investor Modeling to Explain Subprime Crisis: Multi Agent Systems Simulation in Artificial Financial Markets. In: Masri, H., Pérez-Gladish, B., Zopounidis, C. (eds) Financial Decision Aid Using Multiple Criteria. Multiple Criteria Decision Making. Springer, Cham. https://doi.org/10.1007/978-3-319-68876-3_6

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