A Conceptual Model of Investor Behavior

Abstract — Behavioral finance is a subdiscipline of finance that uses insights from cognitive and social psychology in order to enrich our knowledge of how investors make their financial decisions. Agent-based artificial financial markets are bottom-up models of financial markets that start from the micro level of individual investor behavior and map it into the macro level of aggregate market phenomena. It has been recognized in the literature, yet not explored, that such agent-based models are a very suitable tool to generate or test various behavioral hypotheses. To pursue this research idea, first we develop a conceptual model of individual investor that consists of a cognitive model of the investor and a description of the investment environment. In the modeling tradition of cognitive science and intelligent systems, the investor is seen as a learning, adapting, and evolving entity that perceives the environment, processes information, acts upon it, and updates its internal states. This conceptual model can be used to build stylized representations of (classes of) individual investors, and further studied within the paradigm of agent-based artificial financial markets. I