Finding the invisible hand: an objective model of financial markets

A learning model is presented which resolves the ambiguity in the efficient markets concept because it is consistent with rational expectations. Heterogeneous least squares learning alone is sufficient to construct a price which contains all information. Contrary to intuition, there is no need for costly fundamental analysis; instead price is the product of interlocking expectations, and the continual revision of expectations causes price to gravitate to the efficient point. Price bubbles are not an aberration but an intrinsic part of a two phase process (normal / bubble) driven by the proportion of investors who consider price in their decisions. This behaviour can be understood in terms of a hidden substrate in which price is an information storing object, analogous to a set of genes in biology.