Price Formation with Interacting Agents a Behavioral and Information-Theoretic Approach

Abstract

This paper presents a model of financial price formation driven by heterogeneous and interacting agents. We distinguish between rational and irrational agents, incorporating behavioral biases and opinion dynamics. The evolution of market prices is governed by random aggregation of individual demands, which are influenced by both fundamental information and social interactions. We also introduce an information-theoretic framework to quantify uncertainty and surprise in agent decisions and price fluctuations.