Market Modeling Based on Cognitive Agents

In this paper, we present an explanatory multi-agent model. The agents decision making is based on cognitive systems with three basic features (perception, internal processing and action). The interaction of the agents allows us to capture the market dynamics. The three features are derived deductively from the assumption of homeostasis and constitute necessary conditions of a cognitive system. Given a changing environment, homeostasis can be seen as the attempt of a cognitive agent to maintain an internal equilibrium. We model the cognitive system with a time-delay recurrent neural network. We apply our approach to the DEM / USD FX-Market. Fitting realworld data, our approach is superior to a preset benchmark (MLP).