Quantitative Finance

Andersen, Jørgen Vitting;de Peretti, Philippe

2020 Quantitative Finance

doi: 10.1016/j.jbusres.2019.12.034

Abstract: We introduce a new methodology that enables detection of the onset of convergence towards Nash equilibria in simple repeated games with infinitely large strategy spaces, thereby revealing the heuristics used in decision-making. The method works by constraining on a special finite subset of strategies, called decoupled strategies. We show how the technique can be applied to understand price formation in financial market experiments by introducing a predictive measure {\Delta}D: the different between positive decoupled strategies (recommending to buy) and negative decoupled strategies (recommending to sell). Using {\Delta}D we illustrate how the method can predict (at certain special times) participants' actions with a high success rate in a series of experiments