Shifting Power: Leveraging LLMs to Simulate Human Aversion in ABMs of Bilateral Financial Exchanges, A Bond Market Study

Bilateral markets, such as those for government bonds, involve decentralised and opaque transactions between market makers (MMs) and clients, posing significant challenges for traditional modelling approaches. To address these complexities, we introduce TRIBE an agent-based model augmented with a large language model (LLM) to simulate human-like decision-making in trading environments. TRIBE leverages publicly available data and stylised facts to capture realistic trading dynamics, integrating human biases like risk aversion and ambiguity sensitivity into the decision-making processes of agents. Our research yields three key contributions: first, we demonstrate that integrating LLMs into agent-based models to enhance client agency is feasible and enriches the simulation of agent behaviours in complex markets; second, we find that even slight trade aversion encoded within the LLM leads to a complete cessation of trading activity, highlighting the sensitivity of market dynamics to agents’ risk profiles; third, we show that incorporating human-like variability shifts power dynamics towards clients and can disproportionately affect the entire system, often resulting in systemic agent collapse across simulations. These findings underscore the emergent properties that arise when introducing stochastic, human-like decision processes, revealing new system behaviours that enhance the realism and complexity of artificial societies.