LLM Evolution in a Simple Simulated Market

Large language models (LLMs) are being deployed at scale in consequential real-world systems, from financial markets to content moderation to hiring. We show that improving individual model capability can degrade rather than improve system-level outcomes. We hypothesize that shared training and architectures can lead more capable LLMs to behave more similarly, creating correlated actions that do not diversify away. We develop a general framework showing how this correlation creates a non-diversifiable risk floor and test its predictions in financial markets using an agent-based simulation with LLM traders of varying general-purpose capability. We find that: (1) frontier LLMs exhibit significantly correlated behavior that increases with capability; (2) when their shared reasoning is accurate, increasing agent participation reduces market-level risk; and (3) when agents share a common misinformation environment, the same correlated behavior becomes a liability. Together, these results identify a capability paradox: improving individual models does not necessarily produce better system-level outcomes. Whether the same dynamics arise in other domains is an open empirical question.

Markets are a promising way to coordinate AI agent activity for similar reasons to those used to justify markets more broadly. In order to effectively participate in markets, agents need to have informative signals of their own ability to successfully complete a task and the cost of doing so. We propose MarketBench, a benchmark for assessing whether AI agents have these capabilities. We use a 93-task subset of SWE-bench Lite, a software engineering benchmark, with six recently released LLMs as a demonstration. These LLMs are miscalibrated on both success probability and token usage, and auctions built from these self-reports diverge from a full-information allocation. A follow-up intervention where we add information about capabilities from prior experiments to the context improves calibration, but only modestly narrows the gap to a full-information benchmark. We also document the performance of a market-based scaffolding with these LLMs. Our results point to self-assessment as a key bottleneck for market-style coordination of AI agents.

Multi-agent systems powered by large language models (LLMs) are increasingly deployed in settings that shape consequential decisions, both directly and indirectly. Yet it remains unclear whether their outcomes reflect collective reasoning, systematic bias, or mere chance. Recent work has sharpened this question with naming games, showing that even when no individual agent favors any label a priori, populations rapidly break symmetry and reach consensus. Here, we reveal the mechanism by introducing a minimal model, Quantized Simplex Gossip (QSG), and trace the microscopic origin of this agreement to mutual in-context learning. In QSG, agents maintain internal belief states but learn from one another's sampled outputs, so one agent's arbitrary choice becomes the next agent's evidence and can compound toward agreement. By analogy with neutral evolution, we call this sampling-driven regime memetic drift. QSG predicts a crossover from a drift-dominated regime, where consensus is effectively a lottery, to a selection regime, where weak biases are amplified and shape the outcome. We derive scaling laws for drift-induced polarization as a function of population size, communication bandwidth, in-context adaptation rate, and agents' internal uncertainty, and we validate them in both QSG simulations and naming-game experiments with LLM populations. Together, these results provide a framework for studying the collective mechanisms of social representation formation in multi-agent systems.