Physics of Risk

Kirman’s ant colony model, previously presented on our website as agent based (based on 1) and stochastic (based on 2, 3) model, has become classical example of herding modeling. Application of this model towards economic, financial or other social scenarios might seem doubtful as human society is far more complex than ant colony, but methodologically it is more useful to start from very simple and stylized model and later add complexity on top of it. Furthermore we have already shown that Kirman’s herding dynamics could be applicable in agent based marketing (see comparison of Kirman’s and Bass diffusion model). In this text we will consider financial market scenario and obtain stochastic differential equations similar to the existing stochastic models considered in 4, 5. Continue reading “Agent based herding model of financial markets” »