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To: Hawkmoon who wrote (28324)	2/15/1999 8:33:00 PM
From: goldsnow	Respond to of 116906

By Kenenth Chang -- ABCNEWS.com Feb. 15 — Computers can be irrationally exuberant, too. Ever wonder what causes financial markets to jump up and down for no apparent reason? Well, traders sometimes just chase the crowd in search of a profit, a computer simulation shows. “We have defined a market with a multitude of traders who use different types of strategies,” says Thomas Lux, an economist at the University of Bonn in Germany. “It brings out an element of herd behavior into the market.” The ‘Efficient Market' Hypothesis Most economic theories assume that traders act “rationally,” that the price of a company or commodity reflects its fundamental worth based on earnings, debt and future prospects. However, this thinking can't explain, for example, the skyrocketing values of Internet companies that have never turned a profit. Lux, along with Michele Marchesi of University of Caliari in Italy, constructed a computer model in which 500 virtual traders traded one commodity, similar to how a foreign exchange market works. Some of the traders used a strategy that hinged upon the commodity's fundamental value, which fluctuated randomly. Others traded based on market trends, a sort of “trader see, trader do” strategy. Virtual traders could also switch strategies depending on which seemed to be doing better. The result: the market price varied more wildly than the underlying value. abcnews.go.com