# Phase Transition and Symmetry Breaking in the Minority Game

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## Abstract

We show that the Minority Game, a model of interacting heterogeneous agents, can be described as a spin systems and it displays a phase transition between a symmetric phase and a symmetry broken phase where the games outcome is predicable. As a result a “spontaneous magnetization” arises in the spin formalism.

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Market interactions among economic agents give rise to fluctuation phenomena which are raising much interest in statistical physics. The search for a toy system to study agents with market-like interactions has led to the definition of the Minority Game (MG), a model inspired by Arthur’s “El Farrol” problem, which embodies some basic market mechanisms  while keeping the mathematical complexity to a minimum.

In short, the MG is a repeated game where $`N`$ agents have to decide which of two actions (such as buy or sell) to make. With $`N`$ odd, this procedure identifies a minority action as that choosen by the minority. Agents who took the minority action are rewarded by one payoff unit, whereas the majority of agents looses one unit. Agents do not communicate one with the other and they have access to a “public information” – related to past game outcomes – represented by one of $`P`$ possible patterns.

The strategic point of view of game theory may require, in a case like this, a prohibitive computational task for each of the agents. That is specially true if $`N`$ and $`P`$ are very large and agents have not complete information on the detailed mechanism which determines their payoffs, the identity of their opponents or even their number $`N`$. In such complex strategic situations – which are similar to those that agents face in stock markets – agents may prefer to simplify their decision task by looking for simple behavioral rules which prescribe an action for each of the $`P`$ possible patterns. This may be particularly advantageous if computational costs exist.

This behavior, called inductive reasoning in ref. , is the basis of the MG: each agent has a pool of $`S`$ rules which prescribe an action for each of the $`P`$ patterns. At each time, she follows her best rule (see below for a more precise definition). These rules, called strategies below, are initially drawn at random among all possible rules, independently for each agent in order to model agents’ heterogeneity of beliefs and behaviors.

Numerical simulations have shown that this system displays a cooperative phase for large values of the ratio $`\alpha =P/N`$: With respect to the simple “random agent” state – where each agent just tosses a coin to choose her action – agents are better off because they get to enstablish a sort of coordination. For small values of $`\alpha `$ agents receive, on average, poorer payoffs than in the random agent state, a behavior which has been related to crowd effects in markets. A qualitative understanding of this behavior has been given in terms of geometric considerations.

In this Letter we show that the model can be described as a spin system and, as $`\alpha =P/N`$ varies, it undergoes a dynamical phase transition with symmetry breaking. The symmetry which gets broken is the equivalence between the two actions: in the symmetric phase ($`\alpha <\alpha _c`$) both actions are taken by the minority with the same frequency (e.g. there are, on average, as many buyers as sellers). For $`\alpha >\alpha _c`$, in each of the $`P`$ possible states, the minority does more frequently an action than the other one, i.e. the game’s outcome is asymmetric. An asymmetry in the game’s outcome is an opportunity that an agent could in principle exploit to gain. This is called an arbitrage in economics and it bears a particularly relevant meaning (see discussions in ). The asymmetry for $`\alpha >\alpha _c`$ naturally suggests an order parameter and is related to a “phase separation” in the population of agents: while for $`\alpha <\alpha _c`$ all agents use all of their strategies, for $`\alpha >\alpha _c`$ a finite fraction $`\varphi `$ of the agents ends up using only one strategy which, in the spin formalism, is the analog of spontaneous magnetization. The point $`\alpha _c`$ also marks the transition from persistence (for $`\alpha >\alpha _c`$) to anti-persistence ($`\alpha <\alpha _c`$) of the game’s time series.

Let us start from a sharp definition of the model: We use $`+`$ and $``$ to denote the two possible actions, so that a generic action is a sign. At each time $`t`$, the information available to each agent is the string $`\mu _t=(\chi _{t1},\mathrm{},\chi _{tM})`$ of the last $`M`$ actions taken by the minority. This, in our notation is a string of $`M`$ minority signs $`\chi _{tk}\{\pm 1\}`$. There are $`P=2^M`$ possible such strings, which we shall label, by an index $`\mu =1,\mathrm{},P`$. The index $`\mu _t`$ corresponding to $`(\chi _{t1},\mathrm{},\chi _{tM})`$ shall be called the present history, for short. For each history $`\mu `$, a strategy $`a`$ specifies a fixed action $`a^\mu `$ . Each agent $`i=1,\mathrm{},N`$ has $`S=2`$ strategies, denoted by $`a_{\pm ,i}`$, which are randomly drawn from the set of all $`2^P`$ possible strategies (the generalization to $`S>2`$ strategies will be discussed below). We define

$`\omega _i^\mu ={\displaystyle \frac{a_{+,i}^\mu +a_{,i}^\mu }{2}},\xi _i^\mu ={\displaystyle \frac{a_{+,i}^\mu a_{,i}^\mu }{2}}`$

so that the strategies of agent $`i`$ can be written as $`a_{s_i,i}^\mu =\omega _i^\mu +s_i\xi _i^\mu `$ with $`s_i=\pm 1`$. If $`\omega _i^\mu 0`$, then $`\xi _i^\mu =0`$ (and viceversa) and the player always takes the decision $`\omega _i^\mu `$ whenever the history is $`\mu `$. The current best strategy of agent $`i`$, which she shall adopt at time $`t`$, is that which has the highest cumulated payoff. Let us define $`\mathrm{\Delta }_{i,t}U_{i,t}^{(+)}U_{i,t}^{()}`$ as the difference between the cumulated payoffs $`U_{i,t}^{(\pm )}`$ of strategies $`+`$ and $``$ for agent $`i`$ at time $`t`$. Therefore her choice is given by

$$s_i=\text{sign}\mathrm{\Delta }_{i,t}$$
(1)   
where ties ($`\mathrm{\Delta }_{i,t}=0`$) are broken by coin tossing. The difference in the population of agents choosing the $`+`$ and the $``$ sign, at time $`t`$, is then

$$A_t=\underset{i=1}{\overset{N}{}}a_{s_i,i}^{\mu _t}=\mathrm{\Omega }^{\mu _t}+\underset{i=1}{\overset{N}{}}\xi _i^{\mu _t}s_i$$
(2)   
where $`\mathrm{\Omega }^\mu =_i\omega _i^\mu `$. The sign chosen by the minority gives the minority sign at time $`t`$

$$\chi _t=\text{sign}A_t$$
(3)   
and this determines the new history $`\mu _{t+1}`$ which corresponds to the string $`(\chi _t,\mathrm{},\chi _{tM+1})`$. Finally, each agent $`i`$ rewards those of her strategies which have predicted the right sign ($`a_{s,i}^{\mu _t}=\chi _t`$) updating the cumulated payoffs $`U_{i,t+1}^{(\pm )}=U_{i,t}^{(\pm )}+a_{\pm ,i}^{\mu _t}\chi _t`$. This implies that the cumulated payoff difference $`\mathrm{\Delta }_{i,t}`$ is updated according to

$$\mathrm{\Delta }_{i,t+1}=\mathrm{\Delta }_{i,t}+2\chi _t\xi _i^{\mu _t}.$$
(4)   
Eqs. (14) update the state $`\{\mu _t,\mathrm{\Delta }_{i,t}\}`$ of the system from $`t`$ to $`t+1`$. With an initial condition (e.g. $`\mu _0=1`$, $`\mathrm{\Delta }_{i,0}=0`$, $`i`$) the dynamics of the MG is completely specified. The “quenched” variables $`\{\mathrm{\Omega }^\mu ,\xi _i^\mu \}`$ play here the same role as disorder in statistical mechanics.

An important quantity in the MG is the variance $`\sigma ^2=A^2`$ of the difference $`A`$ in the sizes of the two populations, where $``$ is a time average in the stationary state of the process specified by Eqs. (14). The number of winners, at each time step, is $`(N|A|)/2(N\sigma )/2`$ so that smaller fluctuations $`\sigma ^2`$ correspond to larger global gain. A population of random agents would yield $`\sigma ^2=N`$. Numerical simulations  (see Fig. 1) show that, for $`\alpha =P/N`$ large enough, agents with inductive reasoning manage to behave globally better (i.e. $`\sigma ^2<N`$) than random agents whereas $`\sigma ^2>N`$ for small $`\alpha `$ (see Fig. 1). However no singularity (and no order parameter) has been yet identified in order to locate a phase transition.

As shown in ref. , to a good approximation one can neglect the coupling of the dynamics of $`\mathrm{\Delta }_{i,t}`$ and $`\mu _t`$ and replace the dynamics of the latter by random sampling of the history space, i.e. $`\mathrm{Prob}(\mu _t=\mu )=1/P`$, $`\mu `$. This simplifies considerably our discussion since then

$$\sigma ^2\frac{1}{P}\underset{\mu =1}{\overset{P}{}}\left(\mathrm{\Omega }^\mu \right)^2+2\underset{i=1}{\overset{N}{}}h_is_i+\underset{i,j=1}{\overset{N}{}}J_{i,j}s_is_j,$$
(5)   
where $``$ stands for a time average and

$$h_i=\frac{1}{P}\underset{\mu =1}{\overset{P}{}}\mathrm{\Omega }^\mu \xi _i^\mu ,J_{i,j}=\frac{1}{P}\underset{\mu =1}{\overset{P}{}}\xi _i^\mu \xi _j^\mu .$$
(6)   
The field $`h_i`$ measures the difference of correlation of the two strategies with $`\mathrm{\Omega }^\mu `$ whereas the coupling $`J_{i,j}`$ accounts for the interaction between agents as well as for agents self-interaction ($`J_{i,i}`$). The structure of the couplings (6) is reminiscent of neural networks models where $`\xi _i^\mu `$ play the role of memory patterns. This similarity confirms the conclusion of refs. that the relevant parameter is the ratio $`\alpha =P/N`$ between the number of patterns and the number of spins.

The key element which is at the origin of the behavior of the model is the fact that for each history $`\mu `$, there are agents which always take the same decision. This gives rise to the time independent contribution $`\mathrm{\Omega }^\mu `$ in $`A`$ which produces a bias in the value of $`\chi _t`$ whenever $`\mu _t=\mu `$. A measure of this bias, is given by the parameter

$$\theta =\sqrt{\frac{1}{P}\underset{\mu =1}{\overset{P}{}}\chi |\mu ^2}$$
(7)   
where $`\chi |\mu `$ is the conditional average of $`\chi _t`$ given that $`\mu _t=\mu `$. Loosely speaking, $`\theta `$ measures the presence of information or arbitrages in the signal $`\chi _t`$. If $`\theta >0`$ an agent with strategies of “length” $`M=\mathrm{log}_2P`$, can detect and exploit this information if one of her’s strategies is more correlated with $`\chi |\mu `$ than the other. More precisely, we observe that if $`v_i\mathrm{\Delta }_{i,t+1}\mathrm{\Delta }_{i,t}0`$ then $`\mathrm{\Delta }_{i,t}v_it`$ grows linearly with time, and the agent’s spin will always take the value $`s_i=\text{sign}v_i`$. We shall call this a frozen agent, since her spin variable is frozen. We find

$$v_i=\chi _t\xi _i^{\mu _t}\frac{1}{P}\underset{\mu =1}{\overset{P}{}}\chi |\mu \xi _i^\mu h_i\underset{j=1}{\overset{N}{}}J_{i,j}s_j$$
(8)   
where the last equation relies on an expansion of $`\chi |\mu `$ to linear order in $`A`$.

It is instructive to consider first the case where other agents choose by coin tossing (i.e. $`s_j=0`$ for $`ji`$) so that $`v_ih_iJ_{i,i}s_i`$. If $`v_i0`$ then $`s_i=\text{sign}v_i=\text{sign}(h_i+J_{i,i}s_i)`$. But this last equation has a solution only if $`|h_i|>J_{i,i}`$ whereas otherwise $`|s_i|<1`$ and $`v_i=0`$. Note that $`J_{i,i}1/2`$ and that $`h_i`$ can be approximated by a gaussian variable with zero average and variance $`(4\alpha )^1`$. This means that $`|h_i|J_{i,i}`$ for $`\alpha 1`$, which implies that most agents have $`s_i0`$ in this limit and we can indeed neglect agent–agent interaction. This allows to compute the probability for an agent to be frozen

$$\varphi =P\{|h_i|>J_{i,i}\}e^{\alpha /2},$$
(9)   
for $`\alpha 1`$. Numerical simulations show that $`\varphi e^{(0.37\pm 0.02)\alpha }`$ indeed decays exponentially. As $`\alpha \mathrm{}`$, the random agents limit is attained because $`s_i0`$ for all $`i`$ and $`s_is_j=s_is_j`$ for $`ij`$. By Eq. (5) we find $`\sigma ^2=_\mu (\mathrm{\Omega }^\mu )^2/P+_iJ_{i,i}N`$.

The same argument applies in general, with the difference that the “bare” field $`h_i`$ must be replaced by the “effective” field $`\stackrel{~}{h}_i=h_i+_{ji}J_{i,j}s_j`$. In order for agent $`i`$ to get frozen, her effective field $`\stackrel{~}{h}_i`$ must ovecome the self interaction $`J_{i,i}`$, i.e. $`|\stackrel{~}{h}_i|>J_{i,i}1/2`$. If this condition is met, $`s_i=\text{sign}\stackrel{~}{h}_i`$. It can also be shown that a frozen agent will, on average, receive a larger payoff than an unfrozen agent. Loosely speaking, one can say that a frozen agent has a good and a bad strategy and the good one remains better than the bad one even when she actually uses it. On the contrary, unfrozen agents have two strategies each of which seems better than the other when it is not adopted. In this sense, symmetry breaking in $`\chi |\mu `$ induced a sort of breakdown in the a priori equivalence of agents’ strategies.

A quantitative analysis of the fully interacting system shall be presented elsewhere. For the time being we shall discuss the behavior of the system on the basis of extensive numerical simulations. Fig. 1 reports the behavior of $`\theta `$, $`\varphi `$ and $`\sigma ^2`$ as functions of $`\alpha `$ for several values of $`P`$. As $`\alpha `$ decreases, i.e. as more and more agents join the game, the arbitrages opportunities, as measured by $`\theta `$ decrease. In loose words, agents’ exploitation of the signal $`\mathrm{\Omega }^\mu `$ weakens its strength by screening it with their adaptive behavior. If the number $`N`$ of agents is small compared to the signal “complexity” $`P=2^M`$, agents exploit only partially the signal $`\mathrm{\Omega }^\mu `$ whereas if $`NP`$ then $`\mathrm{\Omega }^\mu `$ is completely screened by agents’ behavior and $`\theta =0`$. As Figure 1 shows, the parameter $`\theta `$ displays the characteristic behavior of an order parameter with a singularity at $`\alpha _c0.34`$. Accordingly also the fraction $`\varphi `$ of frozen agents drops to zero as $`\alpha \alpha _c^+`$. The comparison between different system sizes in Fig. 1 strongly suggests that $`\varphi `$ drops discontinuously to zero at $`\alpha _c`$ (and it also gives the value of $`\alpha _c`$). The vanishing of $`\varphi `$ is clearly a consequence of the fact that $`\theta `$ also vanishes at $`\alpha _c`$. Indeed if $`\chi |\mu =0`$ for all $`\mu `$, by Eq. (8), also $`v_i=0`$ for all $`i`$, so that $`\mathrm{\Delta }_{i,t}`$ remains bounded and $`|s_i|<1`$.

The transition can also be understood in terms of the variables $`\mathrm{\Delta }_{i,t}`$ as an “unbinding” transition as $`\alpha \alpha _c^{}`$: For $`\alpha <\alpha _c`$ a “bound state” exists with finite $`\mathrm{\Delta }_{i,t}`$, which corresponds to the fact that the equations $`v_i=0`$, $`i=1,\mathrm{},N`$ admit a solution with $`|s_i|<1`$, $`i`$ (only $`P`$ of the equations $`v_i=0`$ are linearly independent). For $`\alpha >\alpha _c`$ this is no longer true and the population separates: a fraction $`\varphi `$ of variables $`\mathrm{\Delta }_{i,t}`$ acquire a constant “velocity” $`v_i0`$ (with $`|s_i|=1`$) whereas for the remaining agents $`v_i=0`$, $`\mathrm{\Delta }_{i,t}`$ remains bounded and $`|s_i|<1`$.

It is suggestive to observe that $`v_i\frac{\sigma ^2}{s_i}`$ so that the dynamics of the minority game is actually similar to a spin dynamics with hamiltonian $`\sigma ^2`$. Indeed either the spin is frozen in the direction which minimizes $`s_iv_i(s_i)`$, or its average $`s_i`$ is such that $`v_i=0`$. This then explains why cooperation occurs in the MG. A closer analysis, to be reported elsewhere, reveals that indeed the stationary state of the MG is described by the ground state properties of an Hamiltonian very similar to $`\sigma ^2`$. Finite size scaling suggests that $`\sigma ^2`$ has a minimum at $`\alpha _c`$ with a discontinuity in its derivative (see Fig. 1). These conclusions are indeed confirmed by exact results. It is worth to stress, however, that the qualitative aspects of the transition are already captured at the simple level of approximation of Eq. (8).

Let us go back to Fig. 1. Above $`\alpha _c`$ agents do not fully exploit the information $`\mathrm{\Omega }^\mu `$ and, as a result, $`\chi |\mu 0`$. Figure 2 shows that $`\chi _t`$ shows persistence in time, in the sense that when $`\mu _t=\mu _{t+\tau }`$ the minority signs $`\chi _t`$ and $`\chi _{t+\tau }`$ tend to be the same. This persistence disappears, $`\chi _t\chi _{t+\tau }|\mu _t=\mu _{t+\tau }0`$ as $`\alpha `$ decreases and it turns into anti-persistence for smaller $`\alpha `$. The oscillatory behavior in Fig. 2 has indeed period $`2P`$ which means that typically when the population comes again on the same history $`\mu `$ it tends to do the opposite of what it did the time before. Even if finite size effects do not allow a definite conclusion, it is quite likely that this change in time correlations also occurs at $`\alpha _c`$. Time correlations, even though of opposite nature, are present both above and below $`\alpha _c`$. These are like arbitrages in a market which could be exploited by agents. In this sense the market is efficient, i.e. arbitrage free, only for $`\alpha =\alpha _c`$.

The same qualitative behavior is expected when agents have $`S>2`$ strategies. Again for a given history $`\mu `$ it may happen that all the $`S`$ agent’s $`i`$ strategies prescribe the same action: agent $`i`$ will do that action no matter what strategy she has choosen. As $`S`$ increases, this will occur for a smaller and smaller number of histories (more precisely with a probability $`2^{1S}`$). This shall correspond to a weaker signal $`\mathrm{\Omega }^\mu `$ which is in complete agreement with the observation  of shallower features for larger $`S`$. Note that, for each agent it would be rewarding to increase the number of strategies because they would have more chances to outguess $`\chi _t`$. At the same time, if all agents increase $`S`$ the game becomes less rewarding for all of them, at least for $`\alpha >\alpha _c`$. This situation is typical of games, such as the tragedy of commons, where many agents interact through a global resource.

The condition $`v_i=0`$ for the bound state in the symmetric phase involves $`P`$ equations with $`(S1)N`$ variables. This suggests that in general the scaling parameter is $`\alpha =P/[(S1)N]`$. The curve $`\sigma ^2/N`$ as a function of $`\alpha =P/[(S1)N]`$ collapse remarkably well one on the other for $`\alpha \alpha _c`$ (especially for $`S>2`$) but not for $`\alpha >\alpha _c`$ (e.g. in the large $`\alpha `$ behavior $`\varphi e^{C(S)\alpha }`$ we found $`C(2)0.37`$, $`C(3)1.50`$ and $`C(4)2.90`$).

Our approach also implies that no coordination is possible if agents have $`S=2`$ opposite strategies ($`a_{+,i}^\mu =a_{,i}^\mu `$) because then $`\mathrm{\Omega }^\mu =0`$. Numerical simulations show that indeed $`\sigma ^2N`$ for all $`\alpha >0`$ in this case.

The same qualitative behavior also occurs in a wide range of related models. First, total freezing occurs in majority models. Note indeed that changing the sign of Eq. (3) would also change the sign in Eq. (8). In particular the self-interaction $`J_{i,i}`$ changes sign so that it becomes favorable for each agent to stick to only one strategy anyway. The model is therefore trivial. More interesting models are obtained keeping the “frustration” effects of the MG but changing the definition of payoffs in Eq. (4). It can be shown that the phase transition and the large $`\alpha `$ behavior are quite robust features of minority games (see e.g. ).

In summary we find that a phase transition occurs in the minority game. The cooperative phase ($`\alpha >\alpha _c`$) is characterized by the presence of a fraction $`\varphi `$ of frozen agents (who use only one strategy), unexploited arbitrages ($`\chi |\mu 0`$) and persistence in the global signal $`\chi _t`$. In the symmetric phase ($`\alpha <\alpha _c`$) inductive dynamics is inefficient: agents adopt strategies when they are no more good. There is no arbitrage (for strategies of length $`M`$) to exploit and the signal shows anti-persistence.

We acknowledge Y.-C. Zhang for enlightening discussions, useful suggestions and for introducing us to the Minority Game. This work was partially supported by Swiss National Science Foundation Grant Nr 20-46918.98.