Wednesday, 22 September 2021 17:00

A research study at CSIC shows how an economy changes when it can be rigged

The model develops tools to think about rigged economic systems. The model develops tools to think about rigged economic systems. Pixabay

A study at the Spanish National Research Council (CSIC) puts forward a mathematical model to explore issues of market manipulation, and how this could change economic relationships (such as contracts or industry) that affect us all. The research makes use of Game Theory, a field developed by the American mathematician John Nash that studies decision making in games (or negotiations) between many actors who must find the most profitable strategies considering also what others will do. Based on this theory, the study simulates economic systems in which anyone can try to alter the rules of the game by paying a fee. The article is published in the journal Physical Review X.

Modern economies evolved from simpler human exchanges into very convoluted systems. Today, economic markets contain multitude of aspects that determine how wealth flows, and that can be left to chance, regulated, or tampered with. “Can a rigged economy be stable? What is an acceptable level of intervention? How does this change as we increase the amount of wealth flowing throw the system, or as the economy becomes more complex (thus offering new opportunities to rig it)? These are some of the questions that this mathematical model poses and attempts to address”, explains Luis F Seoane, CSIC researcher who developed his work at the Institute for Interdisciplinary Physics and Complex Systems (IFISC-CSIC-UIB) and the Spanish National Center for Biotechnology (CNB-CSIC).

As discussed in the paper, if economic intervention is generalized, the microeconomic strategies of different actors can scale up to emergent, macroeconomic effects. The study discovers a strategy that might cause a consensus (such as when a few companies set, unopposed, the prices of a service) to break apart. “In the model, we also observe how very complex economies (with a lot of aspects that can be rigged) enter an unstable regime in which large earnings and losses succeed each other”, says the researcher. The simulations suggest that, to avoid this regime of large fluctuations and keep economies viable in the long term, wealth must grow faster than linearly with the economic complexity.

“This model is readily useful to understand actual scenarios”, Seoane argues. “The recent GameStop affair is a good example. This video game retail store company was very devalued throughout 2020. At the end of January 2021, small investors got coordinated through the social network Reddit to pump up GameStop’s shares. That went viral, catching by surprise several hedge funds, who had bet on a further devaluation of the company. Some of these hedge funds went bankrupt eventually. Investigations of market manipulation (both by Reddit users and brokerage platforms) are still active in several courts and the US congress”, Seoane explains. This new mathematical model considers the manipulation of economic systems at face value: a cost is attached to rigging economic games, and the consequences of such manipulation are studied.

“Thanks to trading apps, the development of cryptocurrencies, and the proliferation of smart contracts (pieces of code allowed to perform financial operations that are executed autonomously) we can expect that the impact of small investors on markets will only grow”, the CSIC researcher notes. “This work analyzes some issues that might emerge because of these technologies, as well as aspects that we should pay attention to to avoid troubles ahead”.

More information

Luís F. Seoane. Games in rigged economies. Physicals Review X.

CSIC Comunicación

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