Exploring Narrative Economics: An Agent-Based Co-Evolutionary Model Featuring Nonlinear Continuous-Time Opinion Dynamics

The efficient market hypothesis has been a leading theory of financial economics for decades. This theory states that financial markets are efficient, in that the price of an asset reflects all available information about its value. However, there are phenomena in financial markets that are difficult to explain using this theory alone. In 2017, Robert Shiller, a Nobel Laureate, introduced the concept of Narrative Economics as an approach to explain these difficult-to-understand economic phenomena. According to this approach, narratives, or stories that participants in asset markets hear, believe, and tell each other, play a crucial role in shaping economic outcomes, such as the price dynamics of digital assets that hold little value. Shiller argues that narratives are critical to understanding seemingly irrational behaviors, such as investing in highly volatile cryptocurrency markets, as people invest based on their beliefs and opinions about the prospects of the asset, which they express in the form of narratives. By incorporating narratives into economic analysis, narrative economics offers a new lens through which to view financial markets and understand the complex behaviors of market participants. This paper extends the work on narrative economics by building upon the agent-based modeling platform developed by Bokhari and Cliff [5] in which the interplay between narratives and price dynamics is achieved by employing the PRDE adaptive zero-intelligence trader strategy introduced by Cliff [11], and the continuous-time real-valued nonlinear opinion dynamics model reported by Bizyaeva et al. [4]. This paper presents a series of meticulously designed experiments aimed at examining the influence of different opinion types on trader behavior, particularly when traders hold neutral opinions. The primary objective of these experiments is to simulate the reciprocal influence between narratives and the dynamism of the market. Our experiments revealed that our simulated market system was able to achieve stability in a controlled environment. Furthermore, we found that the opinions of the entire population of 60 traders could be influenced by just a single trader. This paper contributes to the ongoing dialogue in narrative economics by presenting a robust and reliable experimental platform that facilitates comprehensive empirical studies.