Interacting Agents and Stock Market Crashes
https://www.researchgate.net/publication/317873657_An_Interacting_Agents_Model_Approach_To_Stock_Market_Crashes
While traditional economics are contingent upon individual actors each acting to maximize their own utility, collectively producing aggregate trends, actual aggregate behavior is distinctly based upon the interactions of individuals, producing aggregate trends that are not reflections of single-actor utility maximization.
These behaviors can be analyzed to show the difference between “weak” neighborhood interactions and “strong” neighborhood interactions. In both situations, agents buying and selling a single asset interact with an average opinion of the market (to reflect public opinion). The opinion of the asset starts high at the beginning of the model, and the value of the asset is tweaked to perturb slightly downwards. Weak neighborhood interactions (if each agent is acting in their own interest) creates a smooth curve downwards, as each agent sells when the value of the asset drops below their evenly-distributed thresholds. This smooth behavior is rare in the actual stock market, where neighborhood interactions are strong.
The strong neighborhood interaction creates very sudden, non-smooth drops that is similar to how stocks crash. When fitted with actual stock market data, the strong neighborhood interaction model shows a good fit.