The David Edward Scherer Formula — Version 3.8 introduces an agent-based simulation framework for modeling financial markets as dynamic systems composed of interacting decision-makers. The methodology departs from direct price prediction and instead models the behavioral policies, interactions, and adaptive learning processes of heterogeneous market participants. The framework defines a structured agent universe, including retail participants, institutional investors, market makers, macro-driven funds, quantitative strategies, and forced-flow entities. Each agent operates according to a policy function that maps evolving market states and internal beliefs to observable actions. These actions collectively generate market outcomes through a dynamic interaction network. A core feature of the system is the simulation of feedback loops in which price, belief formation, and agent behavior recursively influence one another. This enables the modeling of reflexivity, cascade events, momentum amplification, and liquidity-driven dislocations. The framework further incorporates real-world frictions such as slippage, liquidity constraints, execution delays, and order book dynamics to enhance structural realism. The methodology includes a belief update system in which agents adapt based on differing information processing mechanisms, producing a multi-layered learning environment. External shocks are propagated through the system via a dedicated simulation layer, allowing for the analysis of systemic risk transmission and amplification across agent classes. Market regimes are not predefined but emerge endogenously from agent interactions, enabling the identification of liquidity-driven, sentiment-driven, and feedback-dominated environments. The framework also provides a strategy stress-testing engine that evaluates investment approaches under simulated conditions, including volatility cascades, liquidity contractions, and regime transitions. This system is designed as a research and analytical tool for exploring market structure, agent behavior, and emergent dynamics. It is not intended as a deterministic prediction model but as a synthetic environment for studying how complex financial behaviors arise from interacting components under realistic constraints.
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David Edward Scherer
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David Edward Scherer (Fri,) studied this question.
www.synapsesocial.com/papers/69db38534fe01fead37c6871 — DOI: https://doi.org/10.5281/zenodo.19498670