Financial Markets and Individual Attitudes: The Stick-balancing Model

Abstract This study presents an order book model to explore the influence of individual traders’ attitudes on financial market stability. To this end, we model traders’ psychological ability to resist external stimuli, by introducing an analogy between their psychomotor capacity to balance unstable objects and the experience in resisting destabilizing financial market signals. Our main results show that the personal experience, i.e., the combination of ability and timing of reaction, of market participants affects the fat tails of the return distribution in our model. Some policy directions are finally drawn.