Adaptive Portfolio Selection by Investment Groups

David C. Parkes and Bernardo A. Huberman


We present a quantitative assessment of the value of communication for a group of adaptive investors in a stock market through the use of a game-theoretic approach to the portfolio selection problem. Members of the group adjust their portfolio as they observe movements of the market over time and communicate to each other their current portfolio and its recent performance. Investors can choose to switch toany portfolio performing better than their own. We show that a group of adaptive investors will outperform both a single adaptive investor and a group of non-adaptive investors. Furthermore, we show that communication between investors in the group improves performance over the adaptive case. Finally, by allowing feedback from investment actions to affect stock prices, we close the gap between traditional portfolio theory and the game-theoretic approach to investment.
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