David Goldbaum joined the School at the beginning of 2007. He received his Ph.D. in economics from the University of Wisconsin-Madison in 1996. His research interests include learning, adaptation, financial markets, information, and rational choice. His most recent research examines social network formation and the emergence of leaders as a social phenomenon.
Places of Interest
Can supervise: YES
Network Formation, Social Influence, Agent-based Modeling, Nonlinear Dynamics, Computational Economics and Finance, Bounded Rationality and Learning, Applied Micro Theory
Macroeconomics, Financial Economics, Financial Systems
I model the behavior of decision-makers seeking conformity and influence in a connected population. The model allows for one-sided linking, with information flowing from the target to the link’s originator. Conformity is achieved only with a social order, necessitating differentiated rewards despite ex ante homogeneity. The leader holds a strategic social location ex post, exerting influence independent of any leadership traits. A strong desire to influence produces non-conforming autonomous decision-makers. Socially detrimental multiple leaders can be sustained as well.
A state of perpetually evolving divergent trading strategies is the natural consequence of a market with idiosyncratic private information. In the face of intrinsic uncertainty about other traders’ strategies, participants resort to learning and adaptation to identify and exploit profitable trading opportunities. Model-consistent use of market-based information generally improves price performance but can inadvertently produce episodes of sudden mispricing. The paper examines the impact of trader’s use of information and bounded rationality on price efficiency.
Goldbaum, D & Zwinkels, RCJ 2014, 'An empirical examination of heterogeneity and switching in foreign exchange markets', Journal of Economic Behavior and Organization, vol. 107, pp. 667-684.View/Download from: UTS OPUS or Publisher's site
In order to study the expectation formation of financial institutions in the foreign exchange market we develop and apply a recursive selection and estimation algorithm to a dataset of surveyed foreign exchange market expectations. Responses are classified into two groups and forecasting models are endogenously determined within the groups. Estimation results reveal that a fundamentalist-chartist model is capable of explaining a large portion of foreign exchange market expectations. Fundamentalists are found to have mean-reverting expectations whereas chartists have contrarian expectations. Allowing panelists to switch between models significantly improves the fit of the model, especially at the relatively shorter forecast horizons. We find that the fundamentalist model is increasingly used as the forecast horizon extends. Finally, results indicate that model choice is based on a combination of period-specific and individual-specific determinants. © 2013 Elsevier B.V. All rights reserved.
Goldbaum, D & Panchenko, V 2010, 'Learning and adaptation's impact on market efficiency', Journal of Economic Behavior and Organization, vol. 76, no. 3, pp. 635-653.View/Download from: UTS OPUS or Publisher's site
A dynamic model with learning and adaptation captures the evolution in trader beliefs and trading strategies. Through a process of learning and observation, traders improve their understanding of the market. Traders also engage in a process of adaptation by switching between trading strategies based on past performance. The asymptotic properties are derived analytically, demonstrating that convergence to efficiency depends on the model of adaptation.
This paper introduces assets for which the intrinsic value is endogenous to the amount of funding attracted. A rational expectations equilibrium is developed. Additionally, simulations of the model based on bounded rationality explore the different market behavior under fundamental and momentum based investing strategies. Both strategies produce herding characteristics. The herding under the fundamental strategy approximates the optimal investing of a rational central planner. The momentum strategy results in suboptimal economic development.
Goldbaum, D & Mizrach, B 2008, 'Estimating the Intensity of Choice in a Dynamic Mutual Fund Allocation Decision', Journal of Economic Dynamics and Control, vol. 32, no. 12, pp. 3866-3876.View/Download from: UTS OPUS or Publisher's site
The paper analyzes the intensity of choice in an agent based financial optimization problem. Mean-variance optimizing agents choose among mutual funds of similar styles but varying performance. We specify a model for the allocation of new funds, switching between funds, and withdrawals and obtain statistically significant estimates of the intensity of choice parameter. This estimate is also given economic interpretation through the underperformance of funds that use an active style. We find that agents with relative risk aversion of 2 will move 1% of their funds from active to passive for an extra 34 basis points of return.
Goldbaum, D 2006, 'Self-organization and the persistence of noise in financial markets', Journal of Economic Dynamics and Control, vol. 30, no. 9-10, pp. 1837-1855.View/Download from: UTS OPUS or Publisher's site
A dynamic model of financial markets with learning is demonstrated to produce a selforganized system that displays critical behavior. The price contains private information that traders learn to extract and employ to forecast future value. Since the price reflects the beliefs of the traders, the learning process is self-referencing. As the market learns to correctly extract information from the price, the market deemphasizes private information. despite the convergence of the model towards the parameters producing efficiency, pricing deviations remain constant due to the increased sensitivity of the price to small errors in information extraction produced by the modelâs own convergence.
Goldbaum, D 2005, 'Market efficiency and learning in an endogenously unstable environment', Journal of Economic Dynamics and Control, vol. 29, pp. 953-978.View/Download from: UTS OPUS or Publisher's site
An informationally inefficiency market is produced without an exogenous source of noise in the price. Fundamental traders acquire private information directly through research. Regression traders employ a learning process to extract the private fundamental information from the public price. The relative popularity between these two strategies evolves based on performance. The model converges towards adoption of regression analysis to the point of creating instability, endogenously producing a noisy price. The lack of a revealing price in the coupled learning and population processes reflects the Grossman and Stiglitz (Amer. Econ. Rev. 70(3)(1980)393) impossibility of informationally efficient markets.
This model incorporates technical trading rules (TTRs) that extract information from the price, allowing the users to benefit from the information. Sustainable profits are possible as long as the price movements reflect changes in the security's intrinsic value. The choice to use the TTR rather than fundamental information is endogenous to the model. Increases in the popularity of the TTR can produce price bubbles and diminish the TTR's ability to extract a reliable signal. Large fluctuations in the TTR's popularity lead to unsustainable periods of positive profits coupled with long-term losses.
This article demonstrates that the endogenous desire to quit smoking can result from a rational consumption path chosen at the time rite consumer begins smoking. This result is obtained without relying oil hidden costs or unknown preferences. A finite-li
This paper develops a nonparametric approach for testing whether an information set is useful for generating greater stock market returns. The approach is model free and thus the test of the information does not depend on the particular assumptions of an asset pricing model. Assuming No Arbitrage, a stochastic discount factor (SDF) is constructed from observed market assets. This SDF can be used as a pricing operator for examining dynamic portfolio returns to indicate the information content in the underlying trading strategy. Trading strategies based on technical trading rules are examined with the developed approach.
Goldbaum, D 2001, 'Price bubbles and the long run profitability of a trend following technical trading' in Kirman, A & Zimmermann, JB (eds), Economics with Heterogeneous Interacting Agents, Springer, Germany, pp. 183-194.
Goldbaum, D 1999, 'Cycles of market stability and instability due to endogenous use of technical trading rules' in Abu-Mostafa, YS, LeBaron, B, Lo, AW & Weigend, AS (eds), Computational Finance - Proceedings of the 6th International Conference, MIT Press, USA, pp. 481-494.
Carson, SL, Dye, TK, Goldbaum, D, Moyer, D & Carson, RT 2015, 'Determining the influence of reddit posts on wikipedia pageviews', AAAI Workshop - Technical Report, International AAAI Conference on Weblogs and Social Media, AAAI, UK, pp. 75-82.View/Download from: UTS OPUS
Copyright © 2015, Association for the Advancement of Artificial Intelligence (www.aaai.org). All rights reserved. The activity of passive content consumers on social media sites is typically difficult to measure. This paper explores the activity of a subset of such consumers by looking at the influence on Wikipedia pageviews of one large Reddit community which frequently links to Wikipedia articles. The subreddit used in this analysis, /r/todayilearned (TIL), features a large number of posts on an eclectic set of topics, but excludes current events, which helps rule out the primary threat to being able to make causal statements. Wikipedia's public hourly pageview data provides a unique opportunity to study the influence of a Reddit post on a Wikipedia page at different time horizons. We here present analyses using posts from 2012 in TIL, showing that the week in which a post references a specific Wikipedia article is associated with a substantial increase in pageviews relative to prior and successive weeks. We then apply functional PC A to the dataset in order to characterize pageview dynamics. We also provide a qualitative analysis of the subset of Wikipedia topics posted to Reddit.
Al-Sharawneh, JA, Williams, M, Wang, X & Goldbaum, D 2011, 'Mitigating Risk in Web-Based Social Network Service Selection: Follow the Leader', The Sixth International Conference on Internet and Web Applications and Services (ICIW 2011), International Conference on Internet and Web Applications and Services, The International Academy, Research and Industry Association (IARIA), St. Maarten, The Netherlands Antilles, pp. 156-164.View/Download from: UTS OPUS
In the Service Web, a huge number of Web services compete to offer similar functionalities from distributed locations. Since no Web service is risk free, this paper aims to mitigate the risk in service selection using 'Follow the Leader' principle as a new approach for risk-reducing strategy. First, we define the user credibility model based on the 'Follow the Leader' principle in web-based social networks. Next we show how to evaluate the Web service credibility based on its trustworthiness and expertise. Finally, we present a dynamic selection model to select the best service with the perceived performance risk and customer risk-attitude considerations. To demonstrate the feasibility and effectiveness of the new 'Follow the Leader' driven approach to alleviate the risk in service selection, we used a Social Network Analysis Studio (SNAS) to verify the validity of the proposed model. The empirical results incorporated in this paper, demonstrate that our approach is a significantly innovative approach as riskreducing strategy in service selection.
Al-Sharawneh, JA, Williams, M & Goldbaum, D 2010, 'Web Service Reputation Prediction based on Customer Feedback Forecasting Model', Enterprise Distributed Object Computing Conference Workshops (EDOCW), 2010 14th IEEE International, Enterprise Distributed Object Computing Conference, IEEE Computer Society, Brazil, pp. 33-40.View/Download from: UTS OPUS or Publisher's site
In the Service Web, customersâ feedback constitutes a substantial component of Web Service reputation and trustworthiness, which in turn impacts the service uptake by consumers in the future. This paper presents an approach to predict reputation in service-oriented environments. For assessing a Web Service reputation, we define reputation key metrics to aggregate the feedback of different aspects of the ratings. In situations where rating feedback is not available, we propose a Feedback Forecasting Model (FFM), based on Expectation Disconfirmation Theory (EDT), to predict the reputation of a web service in dynamic settings. Then we introduce the concept âReputation Aspectâ and show how to compute it efficiently. Finally we show how to integrate the Feedback Forecasting Model into Aspect-Based Reputation Computation. To demonstrate the feasibility and effectiveness of our approach, we test the proposed model using our Service Selection Simulation Studio (4S). The simulation results included in this paper show the applicability and performance of the proposed Reputation Prediction based on the Customer Feedback Forecasting Model. We also show how our model is efficient, particularly in dynamic environments.
Goldbaum, D 2016, 'Networks Formation to Assist Decision Making', SSRN.
Goldbaum, D 2015, 'Equilibrium Analysis of Conformity and Influence on a Social Network'.
Goldbaum, D 2013, 'Follow the Leader: Simulations on a Dynamic Social Network'.
This paper introduces a process of individual adjustment based on private local experiences and observation that allows for the emergence of a global social structure that is the equilibrium to the static follow-the-leader
game of Goldbaum (2013). The setting rewards agents for being early adopters of popular products or trends. From simple, myopic, self-serving adjustment based on historic evidence by individuals emerges the the equilibrium social
structure consisting of a single choice leader and a population of followers, which, in the static setting would require an unlikely degree of coordination to produce. Individual actions take place in a social context with individuals
linked via one-way paths of observation. The strategy by which an agent chooses among the available options evolves over time. Different adjustment emergent processes contribute towards the understanding of the unfolding of events that
generate the equilibrium structure.
Goldbaum, D 2013, 'Learning and Adaptation as a Source of Market Failure'.
Goldbaum, D 2011, 'Experiments on the emergence of social order'.
Goldbaum, D 2010, 'Follow the Leader: Network Simulations Examining Conditions for Emergent Social Hierarchies', UTS F&E Working Paper #155.
Goldbaum, D 2010, 'Follow the leader: Steady state analysis of a dynamic social network'.
Goldbaum, D 2010, 'Learning and adaptation as a source of market failure'.
Goldbaum, D & Panchenko, V 2010, 'Learning and adaptation's impact on emergent market efficiency'.
Goldbaum, D 2009, 'Follow the Leader: Steady State analysis of a Dynamic Social Network'.
Goldbaum, D & Zwinkels, C 2009, 'An Empirical Examination of Learning in Foreign Exchange Market'.
Goldbaum, D 2008, 'Coordinated investing with feedback and learning'.
Goldbaum, D 2008, 'Follow the Leader: Simulations on a Dynamic Social Network'.
An agent based model is developed in which a social hierarchy of leaders and followers emerges from a uniform or random social
network. The formation of the social structure is driven by the desire to be an early adopter of a subsequently popular trend. The
environment is related to a majority game, but introduces the importance of the timing of adoption. The proposed environment is relevant
to a number of settings in which leadership and timing of decisions are important or being perceived as a trend setter is rewarded. The
leadership position can be selfreinforcing. For a professional critic, for example, a cult-of-personality can dictate popular tastes, such
as in art, food, and wine markets. A social hierarchy can also apply to the introduction of new products or ideas including academic
research and financial market analysts.
Goldbaum, D 2008, 'Learning and adaption as a source of market failure'.
Goldbaum, D 2007, 'Heterogeneous beliefs in financial markets: Persistent endogenous noise and informationally efficient markets'.
Goldbaum, D 2007, 'Learning and adaptation as a source of market failure'.
Goldbaum, D 2007, 'Learning and adaption as a source of market failure'.
Goldbaum, D 2006, 'Fully revealing prices and other market anomalies'.
Goldbaum, D & Coate, D 2006, 'Skills, Effort and Performance in Tournaments: A Dynamic Model and Empirical Analysis', Working Paper Rutgers University #2004-007.
Goldbaum, D & Mizrach, B 2004, 'Estimating the Intensity of Choice in a Dynamic Mutual Fund Allocation Decision'.
We estimate the intensity of choice parameter in heterogenous agent models in both a static
and dynamic setting. Mean-variance optimizing agents choose among mutual funds of similar styles
but varying performance. Actively managed funds have a lower Sharpe ratio than passive index funds,
yet they attract a majority share of asset allocation. By estimating the relative growth of passive
funds, we obtain a dynamic estimate of the intensity of choice calibrated to 10 years of mutual fund flows.
Goldbaum, D, 'A Dynamic Model of Information Selection in Asset Markets'.
Goldbaum, D, 'Coordinated Investing with Feedback and Learning'.
Investors select how to distrubute funds between a number of projects.
This paper departs from the standard financial market model by endogenizing the
intrinsic value of the assets to be dependend upon the amount of funding they attract.
Investment strategies based on fundamental and a momentum strategy are compared.
Both strategies produce herding characteristics. For the fundamental strategy herding is optimal.
The momentum strategy can result in suboptimal economic development, but can also produces greater
success for the individual investors utilizing it.
Goldbaum, D, 'Investment and Discovery: Market coordination when investing in projects with endogenous payoffs'.
Goldbaum, D, 'Market Efficiency and Learning in an Endogenously Unstable Environment'.
\tTraders in this model of an asset market have the opportunity to conduct
individual research to acquire a noisy signal of a security's future
value, or they can employ least-squares learning in an attempt at
extracting the private information of other traders through observing the
price. For a fixed proportion of the traders using fundamental research,
n, the model converges to a stable fixed point equilibrium. At the fixed
point, the regression traders outperform the fundamental traders for all
values of n > 0. The equilibrium suffers from a Grossman and Stiglitz
(1980) type paradox of efficient markets. Endogenize n based on
performance and the Grossman-Stiglitz paradox is alleviated. The model is
characterized by an unstable fixed point. As the model converges towards
the fixed point, the regression traders perform well. As n falls, the
regression traders begin to have a substantial impact on the price,
causing greater fluctuations in profits and in n. Inevitably, the actual
n is significantly different than the value of n implicit in the
regression traders' coefficient values, introducing error in the
regression trader's forecast. This leads to substantial mispricing that
results in losses to the regression traders. It also throws the model far
from the fixed point, starting the convergence process over.
Goldbaum, D, 'Market Efficiency and Learning in an Endogenously Unstable Environment'.
A least-squares model governs the learning process as traders attempt to extract private
information from the market price of an asset. Replicator dynamics govern the evolution of the
popularity of this strategy against the alternative, directly acquiring the private information
through research. The lack of a fixed point to the dual dynamics embodies the Grossman and
Stiglitz (1980) impossibility of informationally efficient markets. The asymptotic behavior of the
system has the model switching between price stability and instability, endogenously generating noise
in the price. The asymptotic behavior is the same when all traders access and employ both fundamental
and market information.
Goldbaum, D, 'On the Possibility of Informationally Efficient Markets'.
In a dynamic asset pricing model informed traders receive a noisy signal of the
value of a risky asset while uninformed traders learn to extract the information from the price.
The relative popularity of the two strategies depends on past performance. The asymptotic properties of
the model and the possibility of an informationally efficient market depend on whether the population dynamics
determine the level of popularity of the strategies or the direction of innovation in popularity.
Allowing all traders to access both types of information introduces a stable fixed point, but also a
paradox of inconsistency.
Goldbaum, D, 'On the Possibility of Informationally Efficient Markets'.
In a dynamic asset pricing model informed traders receive a noisy signal of the value of a risky asset while uninformed traders learn to extract the information from the price. The relative popularity of the two strategies depends on past performance. An "intensity of choice" parameter is endogenous, reflecting the traders" confidence in selecting the better of the two strategies. The asymptotic properties of the model depend on the evolutionary process for modeling relative popularity. It also depends on how the treatment of the convergence of the model as the popularity of being informed declines towards zero. It is possible to create prices that are arbitrarily close to perfect efficient
Goldbaum, D, 'On the Possibility of Informationally Efficient Markets: Part b'.
A counter example to the Grossman and Stiglitz (1980) finding of the impossibility of
informationally efficient markets is produced using discrete choice dynamics to govern the evolution
of the trader population that choose between being informed or uninformed based on past performance.
Goldbaum, D, 'PROFITABILITY AND MARKET STABILITY: FUNDAMENTALS AND TECHNICAL TRADING RULES'.
Traders in this simulation of an asset market endogenously
select from available information sources in order to maximize
expected profits. The information options include two noisy
signals of future dividends (the fundamentals) and a simple
trend following technical trading rule. Traders use the
information for constructing a portfolio to hold through to the
next period, consisting of a risky and a risk free asset . Due
to free riding on information conveyed in the market price, the
technical trading rule proves to be profitable when the
market is near the fundamental equilibrium. Popularity of the
technical trading rule alters the price dynamics and can move
the price away from this equilibrium.The tradersÆ selection of
an information source is modeled as a randomized discrete
choice. The greater the expected relative benefit of an
information source, the greater the probability of its
selection. The intensity of choice parameter sets the tradersÆ
sensitivity to expected benefits and plays a major role in
determining market dynamics. In forming expected benefits of
the fundamental information, traders are forward looking
using current market observables. The technical trading rule is
evaluated based on past performance. Once traders have selected
an information source, demand for the risky asset is
aggregated within each information source. A price is
determined to clear the market.Depending on the intensity of
choice setting, computer simulations of the market can result
in growth in the popularity of the technical trading rule
following a series of correct signals. The larger population of
technical traders causes distortions in the market price which
may lead to price bubbles. The price bubble contributes to the
popularity of the trading rule while simultaneously moving
the market further from the fundamental equilibrium. The
eventual collapse of the...
Goldbaum, D & Mizrach, B, 'Estimating the Intensity of Choice in a Dynamic Mutual Fund Allocation Decision'.
We estimate the intensity of choice parameter in heterogenous agent models in both a static and dynamic setting. Mean-variance optimizing agents choose among mutual funds of similar styles but varying performance. Actively managed funds have a lower Sharpe ratio than passive index funds, yet they attract a majority share of asset allocation. By estimating the relative growth of passive funds, we obtain a dynamic estimate of the intensity of
choice calibrated to 10 years of mutual fund flows