Fundamental traders' 'tragedy of the commons': Information costs and other determinants for the survival of experts and noise traders in financial markets

- Determinants of the presence of experts and noise traders are explored.
- Algebraic analyses and agent-based modeling are combined.
- The weight of experts switches between two attractors that can be approximated.
- Switches produce typical statistical features such as volatility clustering.
- Under certain conditions, experts are the ones who are not able to survive.

This study explores the long-standing question about the survival of noise traders in financial markets through the relatively new method of agent-based modeling. We find that, in the normal case, there are two attractors for the ratio of experts versus noise traders. Either experts disappear almost entirely from the market, or they account for a certain fraction, with noise traders still being present. In the dynamic framework, the dynamics switches between these attractors, which leads to the emergence of some typical statistical features of financial markets, such as long memory, leptokurtic returns, and bubbles and crashes. Furthermore, we achieve a general approximation of the attractors and of the switching point in between from relevant determinants.