Review of Behavioral Economics > Vol 4 > Issue 2

Divergent Behavior in Markets with Idiosyncratic Private Information

David Goldbaum, Economics Discipline Group, University of Technology Sydney, Australia,
Suggested Citation
David Goldbaum (2017), "Divergent Behavior in Markets with Idiosyncratic Private Information", Review of Behavioral Economics: Vol. 4: No. 2, pp 181-213.

Published: 13 Sep 2017
© 2017 D. Goldbaum
Financial markets: Anomalies and behavioral finance,  Financial markets: Market efficiency
JEL Codes: G14C62D82
Heterogeneous AgentsEfficient MarketsLearningDynamicsComputational Economics

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In this article:
1. Introduction
2. Model and Development
3. Simulations
4. Discussion
Appendix A Proof of Proposition 3
Appendix B Derivation of Returns


A state of perpetually evolving divergent trading strategies is the natural consequence of a market with idiosyncratic private information. In the face of intrinsic uncertainty about other traders’ strategies, participants resort to learning and adaptation to identify and exploit profitable trading opportunities. Model-consistent use of market-based information generally improves price performance but can inadvertently produce episodes of sudden mispricing. The paper examines the impact of trader’s use of information and bounded rationality on price efficiency.