Chapter V reports simulations in which interaction between fundamentalist and chartist investors produces bubbles and crashes that are absent from the homogeneous-investor simplification.

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Once you drop the assumption of homogeneity, new and complicated things happen to your mathematical models of the market. For instance, assume just two types of investors instead of one. Fundamentalists who believe that each stock or currency has its own intrinsic value and will eventually sell for that value. and chartists, who ignore the fundamentals and only watch the price trends so they can jump on and off bandwagons. In computer simulations by economists Paul de Grawa and Mariana Grimaldi at the Catholic University of Leuven in Belgium, the two groups start interacting in unexpected ways, and price bubbles and crashes arise spontaneously. The market switches from a well-behaved linear system, in which one factor adds predictably to the next, to a chaotic nonlinear system, in which factors interact and yield the unanticipated. And that is with just two classes of investors. How much more complicated and volatile is the market, with almost as many classes as individuals? 3.

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They all aim to measure their returns and fold their cards after the same holding period, whether days or years. given the same information they would make the same decisions while their wealth may vary none of them is rich or powerful enough to influence prices on their own they have in the terminology of economics homogeneous expectations they are price takers not makers they are like the molecules in the perfect idealized gas of a physicist, identical and individually negligible. An equation that describes one such investor can be recycled to describe all. Reality Patently, people are not alike. Even if differences in wealth are disregarded, some buy and hold stocks for 20 years for a pension fund. Others flip stocks daily, speculating on the internet. Some are value investors, who look for stocks in good companies temporarily out of fashion. Others are growth investors who try to catch a ride on rising rockets.